October 17, 2003

Notes: The Escalator to Modernity

I always thought that this was very very nicely put:

Lawrence Summers, "Foreign Aid: Why Do It? And What Works?"

October 17, 1994

When the history of the final twenty years of the twentieth century is written, there will be two big stories: the end of the cold war and the transformation of the developing nations. It is only a slight exaggeration to say that this is the era when 3 billion people got on a rapid escalator to modernity.

Our discussion of foreign aid should start with the recognition that what is happening in the world's emerging markets is probably more important for U.S. interests than it has been at any time in the past fifty years. The maintenance of and support for stable prosperity in those parts of the world where progress is under way is central to the American purpose in the world. Here are five observations on the process of foreign assistance and the promotion of those objectives.

First, to have important effects, policy needs to be leveraged. Even the Marshall Plan financed less than 5 percent of the investment that took place in Western Europe during the late 1940s. Achieving maximum leverage today means transferring knowledge about such subjects as securities markets, bank supervision, and educational reform but also making assistance conditional on policy reforms in the recipient countries.

Second, there is a central role for administering multilateral assistance through international financial institutions. Last year's U.S. contribution to those institutions--about $2 billion--provided about $60 billion in program support, as well as a good deal of technical assistance and policy dialogue.

Third, global problems represent an important item on the U.S. international agenda. Whether it is the security problem associated with extreme poverty, refugee relief, responses to environmental disasters, or even a cure for AIDS, we are moving toward increased assistance in these areas of global concern.

Fourth, U.S. foreign aid should adapt to changes in the private capital market. There still are too many countries for which de facto U.S. policy remains aid, not trade. That is surely wrong if one believes in promoting the private sector.

Finally, investments in people do matter. Increased education for girls, for example, would more than repay its costs purely as a family planning program, but since it is also a public health program and an investment in the next generation, it may well be the highest return investment that we and others can support.

Posted by DeLong at October 17, 2003 05:28 PM | TrackBack


Brad: Before we pat ourselves on the back for granting "foreign aid" primarily to the elites ruling those 3rd world countries, and almost exclusively to those with strategic or resource advantage to us, read this report from Iraq:


Then study up on the Republic of Marshall Islands pact between the US colonialists, the RMI "iroij" royalty, and their abysmally disenfranchised islander subjects, where self-hanging and cholera are the main cause of death, despite the billions in "aid" we pour into the country for Star Wars.

Posted by: Arat Sada on October 17, 2003 09:48 PM

I miss having grown-ups in charge.

Posted by: bakho on October 17, 2003 11:06 PM

And of course, Gingrich et al are laughing their asses off because Wes Clark in Winning Modern Wars calls for an Office of International Assistance at the cabinet level. I too miss the grown ups.

Posted by: chris on October 17, 2003 11:26 PM

Of course you all realize that all the foreign aid in the world is just pissing in the wind if we don't solve some of the structural inequities of globalism.

In the late 80s I was an idealistic Peace Corps volunteer in Guatemala and was pretty well read in development economics and that sort of thing. I worked on a variety of income generation projects, but I was particularly proud of two that I thought were big successes, a chicken farming project and a coffee cooperative.

The chicken project was the inspiration of a group of local campesinos who thought they could tap into the local market for fresh chicken. All I did was fill out the trickle-up grant paperwork to get a small amount of initial funding to get the project started. When I left they were producing about 100 chickens/wk and making a nice weekly income for their efforts.

The coffee cooperative was also locally inspired. The town I worked in was surrounded by large coffee plantations. Many of the poor Mayan campesinos in town worked on the big local coffee plantations for starvation wages, but many also had small plots of land higher up in the mountains, accessable only by horseback, where they would grow small plots of coffee (and pot, but that's another story).

The problem for these small scale growers was that there was no functional local market for ripe unprocessed beans. The big plantations would sometimes buy ripe beans for a pittance. But they were often flooded with their own beans and had no interest in buying from campesinos.

To sell coffee into the export market you need to process it to remove the fruit husk, and then dry it. So a large group of campesinos formed a cooperative in an attempt to build a coffee beneficio (processing plant) that they could use to process their own coffee for sale into the export market. Coffee processing takes a lot of water because the coffee berries are fermented in vats before the fruit husk is removed. So the most expensive aspect of the program was drilling a well. I worked with the cooperative mostly to find sources of credit and grants to get their project off the ground. They broke ground on the project the month that I left and a year later had a functioning plant that had tripled the income of the co-op members. It looked to be a big success. That was 1990.

Fast forward to today. I went back for a visit a couple of years ago on vacation and stopped in to see how the projects were going. First the chicken project. I found the project completely abandoned and overgrown with weeds. Curious to know what went wrong I found the old project leader to ask him. After the initial welcome and beers he said "come with me, I need to show you something" So he hopped on the back of my rented motorcycle and directed me to a neighboring town where it was market day. There at the edge of the market was refrigerated shipping container out of which some guys were selling frozen chicken thighs. Only thighs. An entire shipping container full of thighs. How bizarre.

Turns out they were packaged by Tyson in the US and were being dumped in Guatemala at prices that were LOWER than the local campesinos cost of production not even including labor. Lower than the cost of buying a chick and feeding it for 7 weeks. Apparently the market in the US is mostly for chicken breasts so companies like Tyson dispose of thousands of tons of surplus thighs and other chicken parts in Central America, destroying the markets for locally grown poultry.

You would think that local campesinos could compete even with Tyson as their costs should be pretty low. But you would be wrong. Raising chickens in a productive manner requires feed formula, drugs, insecticides, and chemicals to disinfect the pens before putting new chicks back in them. All of these products are available in Guatemala but are produced exclusively by big multi-national agrochemical companies like Bayer and Dow. They are not cheap and these big agrochemical companies have a virtual monopoly. So basically it is impossible for small farmers cooperatives to compete with Tyson.

As for the coffee cooperative. It was still funcioning, but at least half of the growers had pretty much just abandoned their plots and had fled to the city or the US for jobs. In the past several years, coffee prices has dropped so drastically that campesino growers are being forced off their land in desperation. Unfortunately there are no real jobs for men around Guatemala City because all the multi-national textile sweatshops prefer to hire 15 year old girls, who are much easier to exploit then hardened campesino types. So basically it's flee to the US or starve.

I was somewhat optimistic about the future of Guatemala when I left in 1989. Now I look at the place and don't see much reason to hope. You can pour millions of dollars of aid into that country and it's not going to make a bit of difference unless the basic trade inequities are solved first. That means getting rid of US and European agrigultural subsidies to start. Until that happens (right...when hell freezes over) all the foreign aid in the world is just window dressing.

Far as I can tell, a campesino with a small plot of land in rural Guatemala has basically two options for providing for his family. He can stay there and grow pot or opium, or he can flee to the US to find work. Not much of a choice is it?

Posted by: Kent Lind on October 18, 2003 07:36 AM

Excellent post, Kent Lind, thanks.

I was going to comment that "if one believes in promoting the private sector" may amount to promoting the interests of the already entrenched local wealthy elites or those of foreign multi-nationals with their labor arbitrage practices that also tend to interact less with the local economy. If one is really interested in promoting economic development, a concentration on the distributive effects of their economic development would seem to be essential to their sustainability and this would mean that aid as along side trade would be required as well as some reconsideration/innovation in policy design. Simply dogmatically reiterating that innovation flows from market processes may be a bit too question begging.

Posted by: john c. halasz on October 18, 2003 05:47 PM

Exactly John:

Countries like Guatemala have plenty of private sector. What they need help with from us is in the area of justice and democracy, a fair shake when it comes to trade, and a lot less of the Catholic Church.

Actually I think there are a lot of countries that are probably doomed by their geography to be basket cases and there's not much that can ever be done to help them. The problem is that national boundaries are frequently anacronistic relics from earlier colonial eras, and are drawn with little regard to forming sustainable economies in the 21st century.

In the United States we are lucky enough to have an entire continent to play with. Well, the better part of a continent anyway. So over the past century we have seen giant waves of internal migration as people move off the land to where the jobs are in the industrial cities. In the first half of the 20th century we say massive migrations of southern black sharecroppers to northern industrial cities, and white dust-bowl farmers migrated from the plains to California. In more recent years, huge areas of the northern plains are becoming depopulated as family farms are abandoned to corporate agriculture, or to the prairie.

The situation is no different in the developing world except that national boundaries draw fences around populations forcing them to stay put, or sneak into developed countries as illegal immigrants.

Imagine what North Dakota would look like if we drew national borders around it 100 years ago to prevent out-migration and then put the Catholic Church in charge of population policy. It would look more like Bolivia. The only reason a place like North Dakota looks like part of the developed world is because it gets massive federal farm subsidies, and the surplus labor can flee to more prosperous regions.

Most of the developing world doesn't have either of those options, and is also hamstrung by colonial legacies of injustice and corruption.

Posted by: Kent Lind on October 18, 2003 09:44 PM
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