Do we need evidence-based policy making for health and development policies?

High amounts of aid are flowing from the developed to the developing world. Low overhead- and administration costs try to ensure that most of the aid really arrives in developing countries rather than petering out in (western) administrations. From this perspective, program evaluation is often seen as a squeamish scientific exercise with limited value for the real world where best-practices seem to be more important. The World Bank even published the book ‘Empowerment and Poverty Reduction: A Sourcebook’ with an extensive list of best-practices and seemingly effective poverty reduction strategies but without any evidence whether the recommended approaches actually work. A lack of program evaluation replaces evidence-based with intuition-based interventions. In the usually complex contexts of developing countries, intuition is often wrong with the result of wasted aid money in the best case and significant adverse effects in the worst case. For example, a well-meant free distribution of T-shirts can disrupt the local market for clothes ruining the local clothing industry (as happened by an initiative from Jason Sadler and also by WorldVision). Evidence-based decisions about the allocation of resources demand an investment into impact evaluation, which will improve the overall effectivity of aid.

Good Governance for Development?

The Washington consensus prescribed market liberalization for sustainable growth in developing countries. With the absence of successes, it became apparent that something crucial was missing: institutions. After establishing that institutions are important for development (Hall and Jones 1999; Acemoglu, Johnson et al. 2001), the focus shifted towards ‘good governance’ to support the free market. The agenda contained formalized property rights and democratic institutions for accountability and lower corruption with the ideal of institutions in developed western countries. If countries would implement these institutions, the free market would lead to sustainable growth. Therefore, the agenda is also called market-enhancing governance while alternative agenda of an interventional government as practiced in Asian countries was ruled out because of insufficient government capacities and capabilities in Sub-Saharan Africa. Does good governance lead to growth?

Research for ICT4D

ICT4D

ICT4D stands for Information Communication Technology For Development. The main examples usually are mobile phone applications or Internet to boost sustainable development especially for the poor in developing countries. A technically driven wave of ICT4D in the last decade mainly failed to reach this goal [1, 2].

Two common examples are usually adduced to support this claim. An initiative to establish tele-centers aimed to educate and empower citizens by providing public access to information and communication technologies. Lack of sustainable funding, lack of local technological support and infrastructure as well as lack of demand resulted in a failure of the project. Also the One Laptop Per Child (OLPC) initiative to equip children in developing countries with a robust laptop with learning software stayed behind its goals. The project suffered from technical problems, unsustainable power generation with worn out solar mats and required Internet access for many functions. Moreover, both projects can be questioned whether they are using aid most effectively. Are the most severe problems tackled? Or could aid be used more effectively in other (non-technological) projects?

Interventions against a dictator

The Arab Spring, a wave of revolutions in nondemocratic countries in North Africa and the Middle East, forced some dictators to flee from their countries while others stayed and one faced intervention by an international coalition. Using a stylized game-theoretic model, this article analyzes the decision-making process of a dictator and explains the different outcomes. A rational dictator only leaves the country if the expected costs from punishment outweigh the benefits of staying. For the international coalition, the model identifies a trade-off between the cost of the intervention and the potential for economic benefit from a successful intervention. A higher number of participants in the coalition increases the probability of the intervention’s success. However, if the intervention fails, coalition participants lose all economic benefits. Therefore, an intervening country benefits from the participation of other countries because it lowers the risk of failure. If the intervention succeeds, the economic benefits are shared among all intervening countries. Thus, an intervening country has the most to gain if it acts alone. Furthermore, a country can deliberately abstain from an intervention to benefit from higher shares of economic profit if the intervention fails and coalition members lose all economic benefits. The model can help explain the rarity of unanimous votes for an intervention and the complex and tedious bargaining process surrounding decisions to intervene. Read the full article here at the Journal of International Affairs.

Greece: Growth after Collapse!

In my recent post, I argued that Greece as a peripheral Euro country will suffer severely from a collapse of the Euro. Depreciation of the new domestic currency will extirpate national savings – this expectation will trigger a bank run and a capital flight leading to bankruptcies in the private sector especially for banks. Workers will suffer from low real wages and high unemployment. Also the government’s burden of liabilities denominated in Euro will grow by the devaluation of the domestic currency; a default of the government is not unlikely. Still, Greece will return to economic growth a few years after the crisis!

Is trade liberalization good for the Democratic Republic of Congo?

In the 1960 at the time of independence, the Democratic Republic of Congo (DRC) was one of the most industrialized countries in Africa – only surpassed by South Africa. After two major wars and five million deaths, its economy is devastated, it lost its leading position and fell back to place twenty in GDP (PPP) ranking in 2010 in Africa. Should the government adopt strong trade liberalization policies now to return to its leading position in Africa? Although trade theory claims that no country can get worse off by allowing free trade, this conclusion depends on crucial assumptions. For the DRC, imperfect capital and prohibitively high transportation costs suggest that trade liberalization can have adverse effects. Rather, measures of protection for selected industries would allow the creation of a competitive manufacturing sector ensuring sustainable long-term growth – similar to policies in Asia in the last decades.

Costs of a collapse of the Euro

A collapse of the European Monetary Union (EMU) and a return to their previous currency for each member country would have severe economic impacts. With focus on monetary effects, I will discuss the pros and cons of a collapse of the EMU. Based on these effects, costs can be estimated and put into perspective to a bailout. Costs of a collapse of the EMU significantly outweighs costs of a bailout.

Effect of rich countries’ subsidies on Uganda

The agricultural sector in Uganda contributes a major fraction of GDP and employment. Food crops are the main fraction of agricultural GDP with bananas followed by cereals, root crops, pulses and oilseeds. Despite the domestic production, wheat and rice are imported to serve the urban population. Exports are dominated by cash crops like coffee, cotton, tea and tobacco. In recent years, Uganda also increased sugar production for export. How does export subsidies of rich countries affect Uganda? First, farmers producing food crops will lose because of lower prices. However, a new initiative Everything but Arms (EBA) of the European Union (EU) allows access to the higher priced EU domestic market quota- and tax-free supporting food crops exporters in Uganda recently. Second, food consumers will gain from lower food prices. Third, food security was reduced and world price fluctuations could lead to insufficient food supply before the advent of the EBA initiative.

Japan’s intervention in the foreign-exchange market

Since years, the yen appreciates against the dollar, which makes Japan’s exports more expensive. Repeatedly, Japan’s government intervened in the foreign exchange market via the Bank of Japan with the most recent intervention in October 2011. An intervention to depreciate the exchange rate is done by purchasing foreign currencies / assets. In the case of Japan, this increases the supply of the Yen and, thus, leads to a decrease in its price. However, the past interventions only had very short-term effects and the exchange rate always bounced back to its original value – similar to the past interventions.

China with a pegged currency successfully maintains an underappreciated currency with all the benefits for its exports. Another example is Switzerland, which suffered from appreciation of CHF making exports more difficult. Recently, SNB announced to maintain by all means a weaker CHF and that it would be prepared to buy unlimited foreign assets to sustain the exchange rate of 1.20 franc per euro. Subsequently, the exchange rate indeed stabilized at the announced rate.

One of the main differences between the case in Japan and Switzerland is the determination of the bank. The Japanese one-time intervention is contrasted by the announcement of a permanent lower limit of the exchange rate in Switzerland. Why did Japanese choose a one-time intervention with the risk to be not effective similar to its previous interventions instead of a full-scale stabilization of the exchange rate?

Greece’s Referendum: An Opportunity.

The Euro crisis continues. After the summit last week, most Germans (>80%) believed that this would have been the end of the crisis. Although the package of the summit for Greece and other EMU countries could have been more comprehensive, it was sufficiently substantial to calm the markets. The positive reaction the next days confirmed this convincingly. Then, Papandreou made the surprising announcement of a referendum in Greece about achieving a fiscal balance in exchange of help from the EFSF. Greeks already felt overwhelmed with the current fiscal measures. It is very unlikely that they will vote for more. Without a positive referendum, it will be difficult to disburse money from the fund to Greece. A drop-out from the Euro zone appears more likely. Although I am convinced that a negative referendum will throw Greece into deep misery and will also harm the other Euro countries, there are opportunities to deal with the referendum given that the decision is made.