Since central planning cannot promote economic efficiency, it cannot promote economic progress. Nevertheless, like anyone else, central planners can increase a given output by devoting more resources to its production.
There is nothing surprising about this fact. The nature of the physical world, including the positive relationship between inputs and outputs, is as true for central planners as for anyone else. The distinction between a central planner’s ability to increase a particular output by devoting more resources to its production and his ability to solve the economic problem is where most evaluations of foreign aid go awry.
That’s David Skarbek and Peter Leeson writing on foreign aid in The Cato Journal.
I think they make a nice point: that the beauty of the market is it helps solve the economic problem of how to produce something efficiently, or even whether to produce it at all. The debate about aid effectiveness, however, concentrates on a physical problem: whether by investing resources to effectively produce assistance. These are two different questions evaluated by two different critieria.
Thus, aid boosters are correct to say that aid has done important things: cured this disease, ended that problem. But aid critics are likewise correct to complain that aid doesn’t provide a solution to the economic problem, and so is not really a solution at all.
It’s a point worth making, and the short piece is well worth reading. But I think the authors build and tear down a straw man that represents only some, and possibly little, aid.
Quick thoughts:
- Not all aid is centrally planned. A remarkable number of small communities and organizations compete for scarce funds, allocated by multiple competing donors. I don’t have the numbers at my fingertips, but private donations are a huge chuck of giving.
- Must we only judge aid by efficiency? Many people value equity or some sort of fairness principle, and give to satisfy that preference, individually or through a collective. And depending how you put this into your aggregate welfare calculation, redistribution may be optimal even if grossly inefficient.
- What about market failures, like credit constraints? What if millions of young Africans want to go to school, but lack the resources to pay or the capacity to borrow, even if the net present value is positive? What if governments (or companies, or non-profits) want to build the schools and system to deliver education, but private debt markets won’t make these long term bets? The World Bank was set up precisely for this seeming market failure, and much aid is simply loans offered at longer terms and lower rates than available in the private sector. You can debate whether this is a market failure at all, but that’s my point: you must debate it.
- What about externalities? There are negative spillovers from an AIDS virus run wild, or from large poor populations going to war, or harboring terror. Likewise, there are failures of collective action that a public body, or public funds, can help solve. Think malaria vaccine research and distribution. Aid that shows a zero return to national income may show a huge positive return to global health and stability. Before damning aid, these assertions too must be tackled.
- Last, what if you believe in multiple equilibria, like poverty traps? If manufacturing sectors or rural families need a big push, then central money and organization are needed. I don’t know if I believe in poverty traps, but the development successes of the last century almost all see central planners play a role. What each does may be irreplicable, but that does not make their role any less important.
8 Responses
boooooorrrrring post. old material.
Dear Chris – for much of my working life, I’ve been making regular donations to MSF and a charity that runs a microfinancing program. Is it the view of economists that such donations are pointless, and perhaps even harmful? What is your view? If you think that supporting one or two charities through regular donations is a worthwhile activity, could you offer some advice on what charities I should support? Thank you.
“I don’t have the numbers at my fingertips, but private donations are a huge chuck of giving.”
It is a “huge chunk”, but I am pretty sure that it is much smaller than ODA (Official Development Assistance). I have never seen anyone do a proper study to put numbers up for comparison, but US ODA alone is almost 0.2% of GDP. US private charity is about 2% of GDP, but about half of that goes to churches which give only a tiny percent of their budgets abroad (much less than 10%?) and about another quarter goes to educational institutions (like Harvard!) which is almost entirely domestic. Foreign aid is a very small part of private philanthropy in the US (undoubtedly much less than 10%) and other rich countries generally have more generous governments and stingier private citizens, so the fraction of private aid is going to be even less for the world as a whole.
One of the problems I see with this argument is its assumption that, in the absence of aid, a given issue will eventually be resolved in a well functioning market. One of the greatest benefits aid can provide is context within which markets thrive. A lot of the aid I am familiar with, in one form or another, is at least trying to push for a tipping point where markets will take off.
So no, I do not think that central planning itself is ‘the’ problem with aid: it is a frustrating reality, particularly in cases where markets are not functioning as markets ought. Centrally planned courts, schools, and hospitals seem to work awfully well for the most developed countries, the workers of which, I might add, are so productive that they can offer aid.
If there’s one thing that a free-market dogmateer can never admit the existence of, it’s multiple equilibria — especially as that would imply the very existence of game theory.
“Must we only judge aid by efficiency? Many people value equity or some sort of fairness principle, and give to satisfy that preference, individually or through a collective. And depending how you put this into your aggregate welfare calculation, redistribution may be optimal even if grossly inefficient.”
And how efficiently do we accomplish those other goals? Would I rather give my money to an organization that will not give me much equity per dollar invested or to one that gives more.
Efficiency by itself is only ever a means to other ends, in fact to getting the most of those other ends for the fewest means. The critique should be about “must we only judge aid by total GDP” and then you’ve got plenty of room to talk about social welfare, equality, living standards, the non-monetaries, and on and on.
“Not all aid is centrally planned. A remarkable number of small communities and organizations compete for scarce funds, allocated by multiple competing donors. I don’t have the numbers at my fingertips, but private donations are a huge chuck of giving.”
This sounds very cool, do you (or anyone else) know where I can find more information about this?
“Since central planning cannot promote economic efficiency, it cannot promote economic progress.”
This sort of blindered, ideologically driven dogmatism is really intellectually poisonous. The people at the Cato Institute are often enlightening but on this they are ridiculously off-base. Go to China, go to South Korea, go to Singapore and see what a little central planning can do given the right cultural and political contexts.
To be clear I am not an advocate necessarily of centrally planned economies. They have a lot of downsides (lack of freedom) and can’t work in every context (probably not most of Africa, too much diversity) but to categorically deny that central planning can or has been effective is to have had your head in the sand for the last fifty years in regards to a whole swath of Asian nations.
In general I find the intellectual vitality of the constant back and forth between “free-traders” and “fair traders” (or pick your preferred dichotomous labels) to have grown pretty tired. Although certainly the “Asian tiger development model” should not be simply copied elsewhere (we tried that with the Western development model and look where it has gotten us) I am nevertheless consistently amazed by how little Western discourses on economic development have been impacted by recent Asian experiences that clearly have not followed either right-wing or left-wing Western economic growth prescriptions.
Forgive me for veering slightly off topic.