The Donor community is spending a lot of intellectual effort and billions in loans/grants to improve governance (better
administration and more democracy) under the theory that this will CAUSE faster economic development (see "Governance Matters" at http://www.worldbank.org/wbi/governance/index.htm). I have argued differently (see http://www.worldbank.org/wbi/governance/feedback_received.htm). Either the causality is reversed--faster private sector growth causes better governance--or a third "something" causes governance and development to improve together. The issue of causality is important: Developing countries that use external aid/borrowing for the wrong causes will experience sustained poverty and instability no matter how much external money they receive. In the past, I've suggested that an important element in causing governance and GDP growth to improve together is public sector DOMESTIC borrowing: that is, local currency bond sales to private individuals and companies (see http://users.erols.com/rmyers1/domdbt3.PDF).
         It turns out I'm in good company. I've just finished reading a book by James Macdonald entitled "A FREE NATION DEEP IN DEBT: THE FINANCIAL ROOTS OF DEMOCRACY." The book, a history, is making waves among political economists because it argues that better, more democratic governments emerge when public sector revenue must be obtained primarily from DOMESTIC taxes and borrowing (rather than from external borrowing & aid - my addition). My review and some quotes from Macdonald's book can be seen at: http://users.erols.com/rmyers1/MacdonaldBook.htm . The book should give pause to those, e.g., in the Bush administration, who think that dispensing billions in aid for better governance (whatever that means) will improve either governance or GDP growth. Aid or subsidies for (rural and urban) competitive private sector growth is another matter, however. Such subsidies may both enlarge domestic tax and borrowing bases and improve governance.
         Warm regards, Bob Myers

Feb. 6 2003    Is there anything new about Bush's MCA aid initiative?
        Dear Friends and Colleagues,

        I recently attended a session at the Center for Global Development (CGDev) regarding the Millennium Challenge Account (MCA), a new Bush aid initiative. CGDev, (headed by Nancy Birdsall, a delightful
person of consequence) is a breath of fresh air in the aid community. I recommend its web site (http://www.cgdev.org/), where among other things you can read several notes on the MCA.
            It appears that nearly everyone is unhappy with the current aid system. Many believe that country governments bear the responsibility for robust economic development even though it won't occur without rapid growth in private enterprise and employment. Inadequate private sector growth has become an indictment of country governments, now in need of "fixing" by outsiders (Donors). As a result, the success of Donor aid programs is being measured by whether they fix country governments, not by whether they encourage faster growth in private enterprise and employment. This is an administrator's dream, but an economist's nightmare. President Bush feels that existing donor programs aren't fixing developing country governments. Hence the MCA.
            The MCA is a pot of money to be disbursed, following developing government requests, to about 20 "good" governments by a (yet to be established) US public corporation with a board headed by the US Secretary of State (also responsible for the "failing" USAID). Good governments (i.e., eligible for MCA money) are defined in terms of meeting most of 16 quality-of-governance criteria.
            The MCA doesn't have a chance in hell of improving aid effectiveness. Like all others, its focus is on directly improving governments and only, with luck, indirectly stimulating private enterprise growth. This is backwards. The MCA should focus on disbursing money to stimulate private enterprise growth, following requests from competing businessmen, not governments. This is the surest way to speed economic development AND improve governance.
         Warm regards, Bob Myers

January 13, 2003    Does Bad Governance Drive out Good?
        Dear Friends and Colleagues,
 
        I've just attended the Annual Economics Meetings, held here in DC this year. As usual, I enjoyed them. Membership in the economics profession is intellectually stimulating and socially relevant. Since there are about 450 sessions, each with three or four presentations, it is impossible to give an accurate overall summary of the content and focus of the meetings. I attended 10 sessions and about 25 presentations, mostly on topics of competition, productivity, growth and development. Very little of substance was said about the Bush/Republican initiatives affecting the domestic and international economies. This is partly because there are lags in shaping the agendas of the meetings/sessions. However, it is also probable that economists feel intellectually uncomfortable about the overtly political/religious rather than technical nature of a lot of current economic decision making throughout the world. What can economist sensibly say about, e.g., North Korea and Zimbabwe, where starvation of citizens is a political policy? And what can be said about the current tax-cut mania in the US, being touted at the same time that the military and social claims on governments are increasing significantly? Overall the meetings I attended suggested that there might be a Gresham's law ("bad money drives out good") for politics: The quality of governance worldwide sinks toward the worst.
          A theme in most of the sessions I attended was how the welfare of a growing number of young needing education and old/retired persons on Social Security can be maintained or increased without lowering the welfare of a dwindling (in relative terms) number of working people. Solving these social problems requires that the employed experience significant productivity gains for which they are "under compensated" compared to a free market outcome, so that some productivity gains can be transferred to the non-productive. Good governments effect these transfers through explicit, incentive-neutral increases in taxes and public sector aid programs. Bad governments cause uncertainties and instabilities by depending on the emergence of implicit, haphazard transfers through lotteries, lawsuits, over-reactions to disasters, religiouslargesse, etc.
            Why are governments increasingly relying on the latter rather than the former?

Warm regards, Bob Myers