Uv a lecture 1

Does Aid Work?Exploring the logic of aid

Hans Hoogeveen

Uwazi - TwawezaQuickTime™ and a decompressorare needed to see this picture.

Priors about aid1. Capacity building is important for aid to work

2. Country ownership is required for aid to work. For poverty reduction donors should let developing countries take the lead

3. Expert advice and good information help recipient Governments to achieve results with aid money

4. In designing economic policies and aid projects, assuming benevolent leaders is best practice

5. Corruption hinders development. Aid should only be given to countries with good governance

6. Bonus question: Kim Jong-il (North Korea) is nuts

Basic principles People are rational

People act in their own best interest according to their preferences

People weight pros and cons and take a decision (under uncertainty)

Kim Jung-il is not nuts!

People respond to incentives in a predictable manner If we know people’s preferences we can model their behavior

No conspiracy theories Survival of the fittest in ideas suggests coordination

The local picture:Malnutrition in Tanzania

43,000 dead children every year 2.6% in GDP lost annual due to malnutrition No progress in past decade No food fortification

Fortifications saves 6,700 lives annually Has an 800% rate of return Industry prepared to implement

Specialized nutrition agency

Nearly 10 years of meetings and no real progress in fortification November 2002: The 36th Regional Health Ministers conference (Uganda): Tanzania agrees on “Enhanced Implementation and Coordination of Food Fortification Interventions both at the Regional and National Levels” March 2004: Tanzanian delegates participate in the 1st Regional Food Fortification Workshop (Zambia) to set “Regional Approaches for Joint Food Fortification Activities in ECSA” July 2004: Tanzanian delegates participate in the 2nd Regional Food Fortification Workshop (South Africa) in “Preparing for Optimal Implementation and Use of Food Fortification for the Reduction of Micronutrient Malnutrition” November 2004: 40th Regional Health Ministers’ Conference (Zimbabwe): Tanzania adopts food fortification as a strategy to Prevent and Control Vitamin and Mineral Deficiencies May 2005: TBS and TFNC participate in the ECSA training workshop for laboratory personnel (South Africa) August, 2005: Tanzanian delegates participate in the 3rd Regional Food Fortification Workshop (Uganda) on “Creating Good Partnerships to Accelerate Progress” March 2007: ECSA workshop “Harmonization of Regional Regulations and Standards of Fortified Foods” (Arusha) to develop regional guidelines and standards for a safe and efficacious fortification program. March 2007: ECSA workshop “Strengthening Quality Control and Inspection of Fortified Foods” (Arusha) to discuss ways of strengthening quality control throughout the production and distribution chain of fortified foods. February 2008: The 46th Regional Health Ministers’ Conference (Seychelles): Tanzania agrees to immediately adopt and support implementation of ECSA food fortification guidelines by end of 2009, and increase financial resources by at least 20% within the next two years for nutrition with a focus on micronutrients interventions March, 2008: 2nd ECSA Laboratory Proficiency Tes ting Review Meeting (Malawi) to introduce the Manual of Laboratory Methods for fortified foods October, 2008: 3rd ECSA Laboratory Proficiency Testing Review Meeting (Kenya) to receive updates on analytical assays in support of food fortification programs. November, 2008: 1st African Flour Fortification Initiative (Arusha): MoHSW, TFNC, TBS, TFDA and MoITM commit themselves personally and institutionally to accelerate action towards successful flour fortification. February, 2009: SAFO Workshop: “Towards a Sustainable Cost-Effective Food Fortification Partnership for Tanzania” - mutual understanding about stakeholders capacities, engagement opportunities, public-private partnership set-up and implementation. February, 2009: SAFO Expert Workshop: “Standard Setting in Food Fortification in Tanzania” - current strengths in Tanzanian efforts towards standard setting for food fortification, international experiences in standard setting for food fortification, and discussion of concrete and specific issues around selected standards. March 2009: 48th Regional Health Ministers’ Conference (Swaziland): Tanzania agrees to implement key high impact health and nutrition interventions such as food fortification. May, 2009: Technical Stakeholders Review: discusses the draft Action Plan and decides on an appropriate programme management structure, approach and schedule for the implementation of the Action Plan. September, 2009: High Level Forum on Food Fortification: Participants agree to adopt the Food Fortification Action Plan, promise to take ownership and assume responsibility for the implementation of the Plan September, 2009: 4th Regional Food Fortification Workshop (Kenya) “Consolidating Roles of the Public Sector to Enhance Private Sector Involvement in Food Fortification”: countries share experiences and lessons learnt in start up and implementation of national fortification programs and identify best practices

Allowance schedule

Cities and municipal

councils District and

regional towns Oth er areas

Travel with in Tanza nia Tshs (USD amo unt in brackets) Assistant Directo rs, Principal O fficers, Directo rs, Princip al Secreta ries and above

80,000 ($6 2) 65,000 ($5 0) 45,000 ($3 5)

Senior Officer and Middle Officer 65,000 ($5 0) 45,000 ($3 5) 35,000 ($2 7)

Executive Secretaries to below 45,000 ($3 2) 30,000 ($2 3) 25,000 ($1 9)

Travel ou tside Tanza nia Tshs (USD amo unt s in bracket s) Assistant Directo rs, Principal O fficers, Directo rs, Principal Secreta ries and above

546,000 ($420)

Senior Officer and Middle Officer 474,500 ($365)

Executive Secretaries to below 403,000 ($310) Source: Govern ment of Tan zania, PO-PSM, 20 June 200 8.

The local picture: Statistical reform in Tanzania Quality data are absent

GDP & CPI are of questionable quality Capacity is low Incentives are misaligned

Agreement on $ 30 mln project New institutional environment New building Recruitment Investments in data

Condition: irreversible institutional reform first Internal WB incentives undermine own conditionality

The bigger picture: debt relief For decades it was impossible Became possible due to:

Jubilee 2000 US Senate (+ Bono) World Bank

The big picture Can we explain a set of common LDC characteristics:

Bad social policies Long serving, bad leaders Bad business environment; low growth; protectionism;

cronyism High levels of corruption; Oppression; constrained rule of law No transparency; bad statistics Tribalism; rigged elections

Consider how political institutions are organized

Selectorate theory(Bueno de Mesquita et al. 2003)

Key actors: Leader (L) Winning coalition (W) Selectorate (S)

• Selecorate members can become part of the winning coalition (with probability W/S)

Residents (N) Challenger (C)

Objectives Leadership objectives:

Remain in power• Leaders would not be elected if power was not their prime

motive Maximize discretionary resources Idiosyncratic reasons

• One cannot assume that leaders are benign or interested in public welfare (including in OECD countries)

Choice variables: How much to tax

• Tax rate affects the labor-leisure choice of all citizens How much to spend How to allocate spending between public and private goods

• When W is larger, more is spent on public goods

Transition Transition happens when challenger creates a winning

coalition (i.e. offers more than the incumbent)

Incumbent offers: (g) + (z/W)

Challenger has an information disadvantage because she does not know the loyalty of her supporters She has to offer more reward She will prune her supporters after winning

Challenger offers: (g) + W/S (z/W)

Loyalty Those in the winning coalition are loyal because they always receive more than

those outside it Private benefits Public goods (g) + (z/W) > (g) +W/S (z/W)

Loyalty increases Incumbent (no uncertainty) When W is small When S is large When W/S is small

• (explains why democratic leaders do not stay in office long)

Bad policy is good politics (is rational) under some institutional arrangements (small W/S)

• In large W/S settings (democracy) public policy is a competition in who has the best public policies.

Continuous W/SSmall W/S Military junta (North Korea)

Medium W/S Rigged electoral system (Tanzania)

Democracy (UK / USA)

Democracy (NL)

Large W/S

If small W/S Low growth

High tax / rent seeking / corruption

Few public goods High poverty, inadequate health, education water

Leaders that stay in office for a long time

The case of King Leopold II Enlightened king in Belgium

Promoted economic growth educational reform Public works programs for unemployed

Tyrant in Congo Slave labor Q Quota’s for delivery of goods (ivory, rubber) with severe

punishments As many as 10 million Congolese may have died

Daimler Agrees to Settle a U.S. Bribery CaseBy DAWN KAWAMOTOPosted 10:30 AM 03/24/10 Company News, Investing, Autos

Daimler (DAI) has agreed to pay a $185 million settlement in a bribery case, in which the German automaker is accused of funneling tens of millions of dollars to a number of foreign governments in exchange for their business, according to a source familiar with the issue.

In a criminal complaint filed by the U.S. Department of Justice earlier this week, Daimler faced two counts, one for alleged conspiracy and the other relating to allegations of falsifying books, records and accounts of the publicly traded company.

Under the settlement, Daimler will pay $93.6 million to the Justice Department and $91.4 million to the Securities and Exchange Commission, according to a source. In a copy of the complaint filed with the U.S. District Court in Washington, D.C., Daimler is alleged to have committed these actions over the course of a decade beginning in 1998:

DAIMLER made hundreds of improper payments worth tens of millions of dollars to foreign officials in at least 22 countries - including China, Croatia, Egypt, Greece, Hungary, Indonesia, Iraq, Ivory Coast, Latvia, Nigeria, Russia, Serbia and Montenegro, Thailand, Turkey, Turkmenistan, Uzbekistan, Vietnam, and others - to assist in securing contracts with government customers for the purchase of DAIMLER vehicles valued at hundreds of millions of dollars. In some cases, DAIMLER wired these improper payments to U.S. bank accounts or to the foreign bank accounts of U.S. shell companies in order to transmit the bribe. In at least one instance, a U.S. shell company was incorporated for the specific purpose of entering into a sham consulting agreement with DAIMLER in order to conceal improper payments routed through the shell company to foreign government officials. Certain improper payments even continued as late as January 2008. In all cases, DAIMLER improperly recorded these payments in its corporate books and records.

The lawsuit further alleges that Daimler reaped $50 million in pre-tax profits from corrupt transactions with a territorial connection to the U.S.i

Creating small W/S Increase S

Embrace democracy

Reduce W: Compromise election reporteurs Make use of bloc voting

• Use common identity as means to exploit loyalty• Works best where patron-client relations are strong • Tribalism; religion; unions

Creating small W/S in Tanzania

323 Members of Parliament of which 232 directly elected 10 appointed by president 1 attorney general (ex officio) 5 appointed by Zanzibar parliament 75 special seats (gender equality), apportioned according to

percent of constituencies won

Majority rule requires: 162 = 16 + x + (x/232)75; x = 111 constituencies

Creating small W/S in Tanzania

Strategy I: maximize constituencies won 80% in 2005 gives 186 elected seats + 60 special seats + 47 (deputy) ministers + 16 appointees = 123 assured votes

(162 needed for parliamentary majority)

Strategy II: increase the number of parties that compete Strategy III: maintain a first past the post electoral system Strategy IV: increase cabinet size & special seats

Implications for aid

Does aid have King Leopold characteristics? Leadership in OECD countries has a good narrative about helping

poor people to the selectorate Abroad OECD leadership pursues other objectives with aid money

as oversight is limited• Might this explain limited success of aid?

As long as the OECD tax payer is relatively uninformed, OECD leadership can use aid for its own purposes

• Rewards to firms (loyalty)• Jobs for the boys (loyalty)• Influence in foreign countries (easier with junta’s than with democracies)

Even if selectorate is better informed, aid spending maybe too little money for each voter to determine voting preferences

Implications for aid Poverty reduction is more likely

when there exists a large winning coalition large selectorate system (large W/S) So pursue ‘regime’ change?

But is the theory correct? Correlation is not causality Increasing W/S, democratization

has largely failed Friday we explore this in greater

depth

Tanzania’s Coalition, W/S and W/NS

0

.2

.4

.6

W as % of Selectorate

1 9 8 5 1 9 9 0 1 9 9 5 2 0 0 0 2 0 0 5 2 0 1 0

Y e a r

W o v e r S W o v e r N S

Source: Bueno de Mesquita 2009

HomeworkThe Paris Declaration, endorsed on 2 March 2005, is an international agreement to which over one hundred Ministers, Heads of Agencies and other Senior Officials adhered and committed their countries and organisations to continue to increase efforts in harmonisation, alignment and managing aid for results with a set of monitorable actions and indicators.

Joint progress toward enhanced Aid Effectiveness

Ownership - Developing countries set their own strategies for poverty reduction, improve their institutions and tackle corruption.

Alignment - Donor countries align behind these objectives and use local systems.

Harmonisation - Donor countries coordinate, simplify procedures and share information to avoid duplication.

Results - Developing countries and donors shift focus to development results and results get measured.

Mutual Accountability - Donors and partners are accountable for development results.

What considerations may have convinced donors to embrace the Paris agenda instead of increasing W/S?