Trying to be Less Evil

I have a confession to make. Over the last year or so, I’ve been really quite evil. I really never meant to be, but there it is. Evil as a doorknob. Like many of my ilk, I can pin point the exact day the evil started, it was in November 2009 and I was in the Felix office, chatting to the business editor (you know who you are!). The chat went something like this,

Moi: The government should really pay for education/ health/ hash brownies for the poor.

Satan: Well, if it’s such a good thing, why don’t richer people just pay for it for them anyway? Can’t people just be charitable, or are you saying the government is more moral than everyone else?

And there the bastard had me. Wouldn’t it be a whole lot better if people just came together themselves and sorted out each other’s difficulties? What was it that made government intervention so much better than private action? This got around a WHOLE load of issues too. Want your child to learn evolution? Set up a school that does it. Want poor kids to learn about evolution? Set up a school for them too. Is it really that different from the government doing it? In fact, it should be better- being controlled from near, not Whitehall, means better efficiency and accountability. On top of that, surely the freedom to teach as you wish has a moral value to it? It’s not like current state schools are anything to write home about. Assuming you can write, that is.

I started to see the benefits of privatisation everywhere. I didn’t believe that cuddly services such as health and education should be run purely in pursuit of profit, rather that the freedom should be given to professionals, patients and parents to make their own decisions about services and this freedom comes from privatisation. Every time someone complained that the government should do more for such and such I’d think, “Why don’t you just go ahead and do it, or convince professionals to?” At every stage this was my outlook. How on earth could the government do something better than its citizens, I thought. Yes, most of us don’t have the expertise to set up a school, but neither do most politicians. They hire professionals with our money, why not cut out the middle man and hire them ourselves?

But I wasn’t an evil voice in the wilderness, I had my Gospel and I really did read it religiously; The Economist magazine. You really have to read the thing to understand its allure, but basically it kept me in market- loving, unions- hating rapture for hours on end every week. And when my sister got me a Kindle subscription for Christmas? In the Holy Name of Friedman, I just didn’t stand a chance.

It all reached its zenith when, one fateful May morning, I put an x beside the name of Sir Malcolm Rifkind, Conservative MP for Kensington, my constituency. Yes, that’s right. I’m Rory the Tory. Rory the Milk Snatcher. The Sheriff of Ror-ingham.

But things have since changed. Let me be clear, I really didn’t mean to be evil. I honestly believed the in freedom, efficiency and accountability that letting the market into public goods would bring. I now realise I was mistaken. The purpose of this blog is to explain just why I was mistaken: why markets really aren’t as wonderful as free marketers such as my younger self might hope. Perhaps in the process some other poor devils might realise the errors of their market orientated ways, too.

Market Failure

Even in theory, markets can’t always work properly. A year ago, I’d have said that if there were a more efficient way of doing something, the market will always find it and adopt it, as otherwise businesses wouldn’t survive. Unfortunately, this isn’t the case and market failures can appear in two fundamental ways.

The problem of Lemons. Firstly, I have no problem with fruit and neither do markets. We’re talking about Lemons with a capital ‘L’; crap cars. It’s a well known fact that the very second you drive a new car out of the car shop, it drops fabulously in price in a way that doesn’t make perfect sense. It’s true that everyone likes the idea of being the first owner of a car, but not so much that they would insist on paying many thousands of pounds less just because someone had ‘her’ for a week. Instead, there’s a classic market failure operating.

Imagine you see an ad for a car. It’s almost new and so going for a price not too far off what it would have been hot off the shelves (that’s how a car shop works, right? Shelves and massive industrial trolleys?). It seems like a good deal, but something’s bugging you. If the car’s really so good, why is the guy trying to sell it? Sure you can give it a test drive and check out the MOT, but all that already takes up time and time is money, already making the car more expensive. And even if the MOT etc checks out you’ll still be left wondering why this car’s on sale- unless it’s faulty? Because you don’t know everything there is to know about the car, there’ll always be that doubt. Coupled with the extra money and time it takes to check the car out, this means that inevitably you’re going to offer a lower price than the seller should really get for the car, to compensate for the uncertainty.

But now look at it from the car owner’s perspective; he realises that if he tries to sell the car, the above reasons will mean he gets a poor price. Which means that unless there is an emergency (a new baby, unemployment) he has little incentive to sell a perfectly good car. Unless, of course, it’s faulty. Then he still has every incentive to get rid of the thing.

And now we can see that both buyer and seller will create a spiral; the buyer is scared of Lemons so he offers a low price, the seller doesn’t like the low price so he only sells if he has a Lemon which means even more used cars are Lemons which means the buyer will offer even less to compensate for  the risk and so on. This isn’t so bad when it comes to cars and manufactures now offer guarantees on used cars to alleviate this but it’s still an issue. The big problem is the exact same market failure exists in healthcare- just as Lemons are more likely to be put up for sale, sick people are more likely to take out health insurance. People getting lower prices than they would like for their cars is ok, but sick people finding themselves priced out of insurance really isn’t. There is a clear case for government intervention here. This leads us to the next market failure;

The prisoners’ dilemma. Thisun’s a nice economics parable. There are two recently arrested prisoners being interrogated separately by police. Whatever evidence the police have, it’s not enough for a conviction. The prisoners are each given a choice; either own up to what you and your friend did, in which case you get 2 years in prison and the other guy 10, or you can keep quiet but if the other guy ‘fesses up things are reversed, he gets 2 years you get ten. If you both confess, you get 5 years each. A confusing state of affairs, but it’s clear that the best result for both is to keep quiet. The problem is, since neither of them can be sure the other won’t say anything, the most rational move for each is to confess, rather than run the risk of being the only silent one. All things being equal, keeping quiet gets you an average of 5 years locked, speaking out gets you just 3.5. Two rational prisoners will always tell on each other, leaving both unnecessarily in prison.

There are many real world examples of this, an obvious one being hygiene. Sandwich shops, for example, would have no incentive to spend a small sum on making clean sandwiches if it means making them slightly less competitive than rivals, despite the fact that sandwich shops making people ill is bad for the industry as a whole. Clearly businesses need educated workers and yet it makes no sense for any individual business to invest in schools if those guys are just going to work for someone else. Again, there’s a clear case for government intervention here.

Halfway to Damascus

I was gradually convinced that markets, however rational, could never fully create the optimal outcome for everyone and, sadly, it’s the poorest who would lose out the most. I’m no commie, mind, but these are sensible reasons for a well regulated market system with social welfare and public goods. I haven’t changed altogether. In an election tomorrow, I would still vote Tory (they’re hardly full on free marketers these days) and I don’t necessarily support every last penny spent in the name of welfare. So I’m a long way from skipping down a small country lane with pretty petals in my hair nursing an injured baby rabbit, but the evil has rescinded, somewhat.

A blog for another time, perhaps, but how come nothing happened about the free market ideology that lead to the current recession...? Thoughts on a postcard please.

The Bottom Billion: A Review

International development is, as I said below, a rather murkier business than the rock concerts and emotional advertising would suggest. Eager to understand more I’ve been reading up on the issue and hope to use the summer to fully drown myself in development data and books. Last week I read Poor Economics, which was so good I want to read it again before reviewing it. Over the weekend I got through Paul Collier’s The Bottom Billion; billed as an explanation as to ‘Why the poorest countries are failing and what can be done about it’. That’s one helluva promise. But it really does (broadly) deliver.

What I love about this book is that it manages to be utterly devoid of ideology. It doesn’t even argue that fighting poverty is a moral issue, rather pointing out that the practical benefits more than pay for themselves. This absence of ideology is achieved through a technique after my own scientific heart; statistical evidence. Debate around development tends to be focussed on ‘poverty traps’. The Left believe that being poor to start with keeps you poor; you can’t afford anti- malaria medicine so you get sick which means you can’t work which keeps you poor which means you can’t afford the malaria medicine next time either. All the poor need, say the Left, is one Big Push to get them onto their feet, to buy medicine for them, to educate their children etc. The Right, on the other hand, deny the very existence of such traps with all the passion of Dawkins and his New Atheists. It is aid, they say, which keeps people poor by making them dependent on handouts and putting money in the hands of unpleasant politicians.

Collier, on the other hand, sits betwixt these positions, shaking his scarily educated head. Just look at the evidence, he implores. The Bottom Billion is just that; the evidence. And having been head of development research at the World Bank and now director of the Centre for the Study of African Economies at Oxford, he’s accrued quite a bit of evidence in his time, all of which has lead him to believe that yes there are some poverty traps. But they come in different forms and may be affecting a given country in different ways. These traps are; conflict, natural resources, being landlocked and poor governance.

Conflict

It’s pretty obvious that a country in the midst of a civil war is not going to develop very well economically but what Collier does is to quantify this truism. From the stats, a given failing state has about a 14% chance of civil war within a 5 year period. He finds that each percentage point knocks a percentage point off that risk. So a poor country growing at 2% will have the risk of civil war reduced to 12% whereas a country declining at 2% each year will have the risk increase to 16%. Of course you might think that the prospect of peace leads to greater spending and so peace causes growth and not the other way around but even when growth is caused by a rain shock (a flood, drought of very good rainy season), the same effect is found on the risk of conflict.

This might be hard for many to accept, as it is tempting to believe that rebels are fighting for some kind of cause, not simply because of a low growth rate and besides, isn’t much of Africa’s civil strife simply a result of the horrors of colonialism? But when Collier compared countries with varying levels of economic inequality and oppression of minorities as well as whether or not they had been colonised, he could find no clear evidence that these made countries any more conflict prone.

Never mind the human misery caused by civil war, the impact is economically devastating. Collier puts the economic damage due to civil war at $64 billion to both the country itself and its neighbours. Given that two civil wars on average start every year, that’s about $100 billion lost- more than the entire global aid budget.

So the poorer a country is, the more likely it is the fall into the very conflict that keeps it poor.

Natural Resources

Natural resources should be an easy route out of poverty and yet some of the world’s poorest countries have an abundance of the stuff, just think of Angola and the Democratic Republic of Congo. Natural resources feed into the conflict trap since they provide something clearly worth fighting over, as seen in the movie Blood Diamond set in Sierra Leone. But natural resources can damage any country because they reduce the treasury’s reliance on taxes, thus making politicians less accountable to their people. It is also much easier for politicians to embezzle money from natural resources and spend the money on simply bribing community leaders for their people’s votes.

What can be done?

Simply giving poor countries money is the obvious answer. But when used unwisely, aid can be counterproductive. When money flows into a country in the form of foreign currency (such as with aid) it needs to be converted into local currency to be useful. However, aid isn’t the only foreign currency that needs to become local; money generated from exporting goods also needs to be converted into local cash. So aid money actively competes with exports, reducing the value of engaging in the kind of trade which could pull the country out of poverty. Added to this, many poor countries place high tariffs on imported goods which makes it even less likely that citizens will want to purchase foreign currency; they have nothing to buy with it, reducing the exchange value of the aid.

It also isn’t clear that aid necessarily brings growth (as argued most strongly by NYU’s William Easterly, whose book The White Man’s Burden I roughly summarised here). Collier points out that a good natural experiment for an increase in aid money can be seen by the increases in the Nigerian governments revenues due to record oil prices; no additional growth followed. Not only can direct financial aid have this effect, so can the debt relief so loudly trumpeted by the Live 8 concerts. This doesn’t mean that aid is doomed to failure, rather that it can’t be seen as a magic bullet.

And aid money doesn’t necessarily go where the West might want it to go. Collier estimates that about 11% of aid is actually spent on the country’s army, representing 40% of military spending. Interestingly, Collier finds that the influx of aid increases the probability of a coup; to the victors, the spoils. Aid also reduces the need for economic reform, as it removes its urgency.

Given this, Collier’s conclusion is not that we should give up on aid, rather that it should be given when the time is right. Corrupt governments will only waste the stuff, but once a genuine reformer gets in they should received all the help they can get.

Military Intervention

This is undoubtedly the most controversial section in The Bottom Billion. Remember the $64 billion lost by each civil war? Collier argues that military intervention can prove to be one of the most successful forms of aid, provided intervening forces are prepared to take real risks unlike the infamous peacekeepers in Rwanda, who would only fire when fired upon, not when civilians were at risk. This seems to be an issue away from the main interests of this blog so detail can perhaps wait for another post, but I broadly agree with him here. The economic arguments make a novel addition to the tired (but compelling) moral ones.

Conclusion

Collier, in all, seems convinced that we can chip in. International regulation is his weapon of choice to tackle companies that pay bribes and provide a bench mark for reform minded politicians. His case for military intervention is definitely the most daring of his proposals and in a post Iraq world, the least likely to take place. Aid can make a difference when directed at the right time and at the right kind of investment (like infrastructure). The book is certainly very ‘big picture’ and a proper review of how aid works at the local level will have to wait for my rereading of Poor Economics. All in all, a worthwhile, interesting read.

Oh and the title of the book? Perhaps the most successful criticism contained within the book is contained within that title. It is time, Collier argues, to move away from seeing a world of 1 billion rich people and 5 billion poor when so many of those poor are pulling themselves out of poverty. The Millennium Development Goals make this mistake by bunching the world’s poor together. A new development strategy focussed less on booming China, India and Brazil could achieve a lot more the poorest billion who, so far, seem stuck at the bottom rung.

Beginings

So I’ll be doing this Fulbright summer course this year and they suggested I keep a blog about it. Not one to pass off a chance at self publicity, voila!

The course is entitled Civic Activism which not only covers a lot but also represents a pretty major departure from my physics MSci at Imperial, of which I’ve just finished my third year. But there’s method to the madness as I’m not really cut out for the world of physics research and am hoping instead to go into a rather different field; international development. This basically involves fighting poverty, corruption and crime and generally being a superhero. Or so I wished. Instead, it seems quite a murky, messy world but I’m hoping that a bit of hardnosed scientific method should shed some light in the form of Randomised Controlled Trials which I’m really excited about but will leave for another (lengthier) blog post. 

With departure just over two weeks away now, we (there are 12 of us from the UK on 4 different courses)’ve done quite a lot to get here. Applications are essay based (name a challenge you’ve overcome in life, why do you want to do the course etc) and successful folk are then invited to interview. In Newcastle. Newcastle, if you haven’t heard, has the climate of a Siberian Autumn. And I’m sure Newcastle could be lovely, if it had the good manners to come a little further down south to chill with us lovely guys in London, Bristol and so on. Instead it stubbornly remains up ‘North’ which meant a gruelling 3 hours train journey with intermittent mobile signal and just fifteen minutes of free onboard wifi. You weren’t there man. YOU WEREN’T THERE.

And all this for a twenty minute interview, which went ok.

Visa interviews come next, a short dash across Hyde Park to the US Embassy in Mayfair. I counted fully four bars of phone signal during the entire walk. Joy. Since Fulbright is organised by the State Department there was no need for the common-person 4 hour queue, which was rather gangster, to which three slices of cheesecake only added. Yes, gangsters eat cheesecake. Meeting m’ colleagues was a pleasure, 11 of the finest people this country has to offer, all looking rather dashing in smart- casual attire.

There will be three of us from the UK taking Civic Activism, I think about twenty students in all from across Europe. We’ll be the guests of Drexel University, Philadelphia, for 5 weeks until mid August. From what I’m told, Philadelphia has a large Irish- American population, so I’m hoping to wrangle me a free drink or two with the accent. I’m also gearing up for the legendary Philly cheese steak which just sounds dangerous.

Hopefully I'll be able to fill this blog in over the two weeks leading up to the US (the trials and tribulations of buying electric adaptors and more) and then when we're actually in the place, where we'll be given video cameras for even more professional updates.

Over and out.