13 easterly freedom versus collectivism in foreign aid bc

8/8/2019 13 Easterly Freedom Versus Collectivism in Foreign Aid Bc

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Economic Freedom of the World: 2006 Annual Report 2

The New Collectivism

Marx wa rig abou a lea one ing: Hiory repea

iel, r a ragedy, econd a arce.Te 21st cenu-ry a een a arcical verion o e collecivi uopian

anaie a led o uc diaer in e 20th cenury.

Forunaely, e new collecivim i ar more epidle

exreme, le powerul, and le coercivean e ide-

ologie a caued o muc ragedy in e Communibloc in e 20th cenury. Te collape o communim in

Europe wi e all o e Berlin Wall, and e grea

ucce o e movemen away rom cenral planning

oward marke in oer place like Cina and Vie-

nam a remain nominally Communi (along wi e

povery o e unrepenan Communi ae in Cuba

and Nor Korea) dicredied e Communi noion o

compreenive cenral planning once and or all. Ye, by

an irony a i no o amuing or i inended bene-

ciarie, e new arcical collecivim i ill alive or e

place a can aford i e leae poore naionin e world a receive oreign aid. Inead o e Ber-

lin Wall, we ave an Aid Wall, beind wic poor na-

ion are uppoed o acieve eir ecape rom povery

roug a collecive, op-down plan. Inead o e in-

dividual reedom o proper in marke, e ucceul

approac o e naion a are now ric, e poor mu

le e inernaional exper devie e collecive olu-

ion o eir mierie.

I am graeul or reearc aiance o Julia Scwenkenberg,

and or commen. Some par o i paper alo draw on join

work wi Ariell Ree and Julia Scwenkenberg. Oer par

draw on my book, Te White Mans Burden: Why the Wests E-

orts to Aid the Rest Have Done So Much Ill and So Little Good

(Penguin, 2006).

2 William Duggan o Columbia Buine Scool uggeed e

noion o e Aid Wall o me in privae converaion.

3 Tee eme are developed a greaer leng in William

Eaerly, Te White Mans Burden.

JefreySachsandThe End of Poverty

Le you ink I exaggerae, conider ome o e ae-

men o e mo prominen and exreme pokeman o

e new collecivim or poor naion, Jefrey Sac. In

i 2005 book, Te End o Poverty, e ay in e open-

ing page:

I ave gradually come o underand roug

my cienic reearc and on e ground adviorywork e aweome power in our generaion and

o end e maive ufering o e exreme poor

Aloug inroducory economic exbook

preac individualim and decenralized marke,

our aey and properiy depend a lea a muc

on collecive deciion o g dieae, promoe

good cience and widepread educaion, provide

criical inrarucure, and ac in union o elp e

poore o e poor Collecive acion, roug e-

ecive governmen proviion o eal, educaion,

inrarucure, a well a oreign aiance wenneeded, underpin economic ucce. (Pp. 23)

Sac ay a eac poor counry ould ave ve plan,

uc a an Invemen Plan, wic ow e ize, iming,

and co o e required invemen and a Financial

Plan o und e Invemen Plan, including e calcu-

laion o e Millennium Developmen Goal Financing

Gap, e porion o nancial need e donor will ave

o ll (p. 273). Tee plan will be elpully uppored by

e inernaional communiy:

eac low income counry ould ave e bene-

o a unied and efecive Unied Naion coun-

ry eam, wic coordinae in one place e work

o e UN pecialized agencie, e IMF, and e

World Bank. In eac counry, e UN counry eam

ould be led by a ingle Unied Naion reiden

4 Jefrey Sac, Te End o Poverty: Economic Possibilities or

Our ime (Penguin USA, 2005).

Chapter 2: Freedom versus Collectivism in Foreign Aid

by William Easterly


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0 Chapter 2: Freedom versus Collectivism in Foreign Aid

coordinaor, wo repor o e Unied Naion

Developmen Program, wo in urn repor o e

UN ecreary-general. (P. 285)

Everying will ogeer in one grea global plan run by

e UN Secreary General, [wo] ould enure a e

global compac i pu ino operaion (p. 269).

Like i collecivi predeceor, Sac ee e

acievemen o properiy a moly a ecnical problem:

I believe e ingle mo imporan reaon wy proper-

iy pread, and wy i coninue o pread, i e ran-

miion o ecnologie and e idea underlying em

cience-baed idea o organize producion (p. 41 ). Ari-

ca problem are olvable wi pracical and proven

ecnologie (p. 208).

He ee one kind o cienic expere medi-

cal docora e model or ow o olve e problem

o povery:

Developmen economic oday i no like modern

medicine, bu i ould rive o be o. I can im-

prove dramaically i developmen economi ake

on ome o e key leon o modern medicine,

bo in e developmen o e underlying cience

and in e yemaizaion o clinical pracice, e

poin were cience i broug o bear on a paricu-

lar paien. (P. 75)

O coure, ere are uc ing a public good,

wic require olving a collecive acion problem o up-ply em. Tere i a role or governmen o upply uc

good. However, Sac (and e oer collecive ap-

proace decribed below) eem o make lile diinc-

ion beween a lack o public good and a lack o privae

good, wic i called povery.

TheUnitedNationsMillenniumDevelopmentGoals

Te Unied Naion i e main ocial ponor o oday

collecivi anaie. Tee are called e Millennium

5 Sac ee imel a e eir o e 18th cenury Enligen-

men, uggeing a many o i weee rui are ju wiin

our reac. Unorunaely, e branc o e Enligenmen e

ollow i e one wi a ubriic ai in e power o our rea-

on o redeign ociey, wic led rig away o e excee o

e Frenc Revoluion and ave ince mibegoen variou uo-

pian experimen. He eem o ave mied ou on e individu-

ali branc o e Enligenmen, e one a gave u Adam

Smi and e US Coniuion. Ti par o e Enligenmen

underood a individual ponaneouly puruing eir own

aciviie accompli more an raionali collecivim.

Developmen Goal (MDG), decribed on e Unied Na-

ion web ie a ollow:

Te eig Millennium Developmen Goal (MDG)

wic range rom alving exreme povery o al-

ing e pread o HIV/AIDS and providing uni-

veral primary educaion, all by e arge dae o

2015orm a blueprin agreed o by all e world

counrie and all e world leading developmen

iniuion. Tey ave galvanized unprecedened

efor o mee e need o e world poore.

Secreary-General Ko Annan ue e collecivi we:

We will ave ime o reac e Millennium Devel-

opmen Goalworldwide and in mo, or even all,

individual counriebu only i we break wi bui-

ne a uual. We canno win overnig. Succe will

require uained acion acro e enire decade be-ween now and e deadline. I ake ime o rain

e eacer, nure and engineer; o build e road,

cool and opial; o grow e mall and large

buinee able o creae e job and income needed.

So we mu ar now. And we mu more an dou-

ble global developmen aiance over e nex ew

year. Noing le will elp o acieve e Goal.

Te Secreary-General ue grow a an acive verb ap-

plied o buine, omeing a we mu ar now.

Someow collecive acion will creae job and income,a oppoed o e decenralized efor o individual en-

repreneur and rm operaing in ree marke.

Inoar a e MDG campaign menion privae en-

repreneur, ey are parner ubjec o our reolve:

We reolve urer: o develop and implemen

raegie a give young people everywere a real

cance o nd decen and producive work o

develop rong parnerip wi e privae ec-

or and wi civil ociey organizaion in purui

o developmen and povery eradicaion.

Par o e reaon or i campaign i no ju o elp

e world poor, bu o elp e UN, a Ko Annan made

6 .

7 .

UN Millennium Declaration 2000 .


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clear a e Sepember 2005 World Summi on e MDG:

i i alo a cance o revialize e Unied Naion iel.

In i i a been ucceul, a lea a e World Bank and

e IMF. Tee wo organizaion ave long preaced e

virue o ree marke and ignored UN bureaucra preac-

ing ai reoric. Inexplicably, e World Bank and IMF

ave ince 2000 embraced e UN MDG exercie and a

lo o i planning. An OECD-DAC documen explain i

palace coup in avor o collecivi planning a ollow.

In e 1990, e eld o inernaional developmen

enered an era o reorm and reormulaion a e

dipariie beween ric and poor counrie in-

creaed. World leader, in collaboraion wi e UN

and oer mulilaeral iniuion, recognized e

need or draic meaure o enure a developing

counrie beneed rom globalizaion and a de-

velopmen aiance und were ued equiably and

efecively o acieve e global developmen aimembodied in e Millennium Developmen Goal

(MDG) and oer naional developmen goal.0

In eir Global Monitoring Report 2006: Millennium De-

velopment Goals: Strengthening Mutual Accountability,

Aid, rade, and Governance, e IMF and World Bank

make clear eir embrace o e wole MDG planning

exercie: Donor and e inernaional nancial iniu-

ion mu increae aid ow, improve aid qualiy, and

beer align eir uppor wi counry raegie and y-

em (p. 1). How would i be done? Te World Bank andIMF rearm a commimen o accounabiliy or aciev-

ing reul, wic ey noe wa already rearmed our

year earlier in e UN Monerrey Summi. On e ame

page, e repor noe wiou irony a inernaional

nancial iniuion [uc a e World Bank and IMF]

ill empaize loan and repor raer an develop-

men oucome (p. 1). Tey are ill aving ome di-

culy, a a ew page laer ey canno keep emelve

rom empaizing loan, apologizing a in 2005 lend-

ing roug e conceional and non-conceional win-

dow o e MDB declined (p. 9).

9 .

0 Managing or Development Results [MDR] Principles in Ac-

tion: Sourcebook on Emerging Good Practice (OECD-DAC, 2006),

, p. 4.

Global Monitoring Report 2006: Millennium Development

Goals: Strengthening Mutual Accountability, Aid, rade, and

Governance (World Bank Publicaion, 2006).

Tey plan o cange eir way by Implemening

e reul agenda:

Te 2004 Marrakec Roundable on Reul called

or a monioring yem o ae e reul ori-

enaion o e mulilaeral developmen bank

(MDB); a yem i COMPAS, e Common

Perormance Aemen Syem, wic draw on

MDB ramework and acion plan o implemen

managing or developmen reul (MDR). (P. 9)

ManagingorDevelopmentResults(MDR)

Exacly wa i MDR? I i ummed up inManaging or

Development Results Principles in Action: Sourcebook on

Emerging Good Practice (MDR Sourcebook), prepared by

e OECD and e World Bank, wic conain e ol-

lowing elpul diagram own in Figure 2.1. o clear up

any conuion, e MDR Sourcebook noe a Peror-mance managemen i a oliic, culural cange (p. 8).

Wen i doe ge a ad more concree, MDR eem o in-

volve a lo o cenral planning, uc a e ollowing:

At the national level (see Part 2), MDR i ued in

e planning and implemenaion o reul-baed

naional plan, budge, and anipovery raegie.

Inernaional agencie may uppor i proce

wi ecnical aiance.

Figure2.1: ManagingorResultsaccordingtotheMDRSourcebook

Diagram ater Perormance Management, MfDR Principles in

Action: Sourcebook on Emerging Good Practice, p. . Reproduced

with permission


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In sector programs and projects (see Part 3),

parner counrie and developmen agencie ue

MDR in planning aiance program or individ-

ual projec a are baed on counry oucome

and prioriie dened in naional or ecor devel-

opmen plan. (P. 4)

I doen ge any beer reading e re o e MDR

Sourcebook. In e able on page 134 o e MDR Source-

book i e enible principle: Keep reul meauremen

and reporing a imple, co-efecive, and uer-riend-

ly a poible. (p.134). Below i an excerp rom e a-

ble giving e recipe or imple, co-efecive, and uer-

riendly reul meauremen and reporing:

Examplesotoolsbeingusedtomanage

orresultsindevelopmentagencies

M&E systems, plans and guidelines (incorporating MIS)

Audit and risk management rameworksPerormance measurement rameworks

Program/project monitoring rameworks

Audit guidelines and tools

Evaluation guidelines and tools

Risk analysis guidelines and tools

Training and guidelines or indicator design, data

collection, and analysis

Te old collecivi were leal; e new collecivi ju

bury lie and dea iue under ix layer o bureaucracy.All e MDG planner ue e word accounabiliy

requenly, bu wiou underanding wa accounabil-

iy i. Unlike e individual accounabiliy a eac pro-

ducer ace in ree marke (you aiy e cuomer or

you go ou o buine), e MDG exercie a omeing

called muual accounabiliy. Ti murky noion appear

o involve accounabiliy, no o e inended beneciarie,

bu o e oer bureaucracie involved in e MDG plan,

all o wom ave a ake in e curren yem coninuing

regardle o reul. Inead o individual accounabiliy,

we ave collecive reponibiliy: Developmen agencie

are creaing reul-baed counry aiance raegie in

cloe dialogue wi naional governmen During i

proce, muliple agencie negoiae a proce or work-

ing ogeer o uppor counry oucome. A yem in

wic everyone (muliple agencie and governmen) are

collecively reponible i equivalen o one in wic no-

body i individually reponible. I ere are diappoining

2 MDR Principles in Action (MDR Sourcebook), p. 11.

reul, you can alway blame omeone ele. Collecive re-

ponibiliy i o accounabiliy wa collecive arm are

o individual propery rig.

2 Freedom versus Collectivism

in Economic Development:The Empirical Record

Te empirical record on e diference beween e eco-

nomic perormance o reedom and a o collecivim

i airly clear o anybody ollowing even o e la al

cenury. Tere wa a period rom e 1930 roug e

1950 wen e rapid grow o e Sovie Union (ince

ound o ave been grealy exaggeraed) made oberver

unure a o wic yem delivered uperior economic

reul. Unorunaely, ee were e ormaive year o

developmen economic and oreign aid policie, wicled many o e early developmen economi o recom-

mend a poor counrie imiae e collecivi model,

reing orced aving and invemen o acieve grow,

and o advocae naional economic planning (omewere

in e neerworld in beween cenral planning and ree

marke). Aloug e World Bank and e IMF ad

abandoned cenral planning a e recommended ap-

proac o poor counrie by e 1980, oreign aid a

never been able o ake i collecivi origin. For one

ing, e World Bank and e IMF coninued o uncion

a large planning organizaion; i wa ju a now eop-down exper-driven plan included adopion o ree-

marke liberalizaion (known a rucural adjumen).

Te op-down planning by oreign exper and bureau-

cra o ow you ould implemen ree marke did no

lead o good reul in e area were i wa mo inen-

ively pracicedArica, e Middle Ea, Lain Ameri-

ca, and (ironically) e ormer Sovie Union. Ti led o

e unorunae backla again ree marke a we

are eeing oday in many par o oe region. Te aid

organizaion rereaed or el-proecion ino e MDG

planning exercie decribed in e r ecion.

Ti i ironic, becaue e all o e Berlin Wall

and more acce o inormaion abou e Sovie Union

and i aellie made clear ju ow badly e mo ex-

reme verion o collecivim ad ailed. Even prior o i,

i wa raer obviou a ree ocieie were dramai-

cally ou-perorming collecivi one, a e mo caual

acquainance wi comparion beween Ea and We

Germany, Nor and Sou Korea, or beween e Sovie

Union and e Unied Sae made clear.


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Economic Freedom of the World: 2006 Annual Report

TheCorrelationbetweenEconomicSuccessandEconomicFreedom

oday, long aer e collape o communim, ere i il l

a uge amoun o variaion rom ree o unree ocieie.

o ormalize e obviou, economic ucce i rongly

correlaed wi economic reedom, a own in Figure 2.2.

I ue e 2002 meaure publied inEconomic Freedom o

the World: 2004 Annual Reporto mac e la year or

wic a large ample o daa on income i available.

O coure, ere i a large problem o poenial re-

vere caualiyricer people mig demand more eco-

nomic reedom. Criic o e meaure publied inEco-nomic Freedom o the Worldalo mig allege a ey are

conruced by oe wi rong prior belie a eco-

nomic reedom i aociaed wi properiy and, ence,

e indice mig be unconciouly kewed o give iger

core o counrie known o be ucce orie. (I don

know o any reaon o doub e Index publied inEco-

nomic Freedom o the World, wic ue only ird-pary

daa and include no ubjecive judgmen, bu I bend

over backward o anicipae poible criique.) Any uc

kewing would inroduce a econd kind o revere caual-

iy. o addre ee poible objecion, I ow an inru-

menal variable regreion in able 2.1. Since e ini-

uion o economic reedom originaed in Europe and

en pread o oer emperae region were European

eled (wi ome excepion), I ue diance rom e

equaor a one inrumen or economic reedom. Since

diferen legal radiion (epecially e Brii) avored

economic reedom wile oer did no (obviouly e

ociali legal radiion), I ue legal origin a anoer e

o inrumen or reedom. Te e aiic on e va-

lidiy o e inrumen are moly aiacory, and we

ill ow a very rong aociaion beween economic

reedom and per-capia income.

ThePovertyTrapandtheBigPush

Aloug economic reedom eem well eablied a a

pa o properiy, advocae o collecivi oluion o

world povery allege a poor counrie are in a povery

rap. Te povery rap would preven poor naion rom

experiencing economic grow even i ey do ave eco-

nomic reedom, requiring a collecivi recue operaion.

I i, again, Sac wo i e leading exponen o e pov-

ery rap ypoei. In Te End o Poverty, e ugge

ree principle mecanim. Te r i a poor people

do no ave enoug.

Wen people are uerly deiue, ey need

eir enire income, or more, ju o urvive. Tere

i no margin o income above urvival a can beinveed or e uure. Ti i e main reaon wy

e poore o e poor are mo prone o becom-

ing rapped wi low or negaive economic grow

rae. Tey are oo poor o ave or e uure and

ereby accumulae e capial a could pull

em ou o eir curren miery. (Pp. 5657)

Sac econd reaon or a povery rap i a demo-

grapic rap, wen impoveried amilie cooe o ave

lo o cildren (p. 65). Populaion grow i o ig a

i oupace aving (wic wa already oo low, accordingo e r reaon).

Table2.1: IVRegressionoLogper-CapitaIncome(lpcy)

in2002onEconomicFreedomRatings

lpcy

Economic reedom in the world, (romEconomic Freedom of the World: 2004 Annual

Report)

.33(.)**

Constant .

(.)

Observations

*signifcant at %; ** signifcant at %

Sargan over-identifcation test: p-value .

First-stage F-statistic on excluded instruments .

Instruments or economic reedom: distance rom equator,

British, French, Socialist, or German legal origin

Figure2.2: EconomicFreedomintheWorld,2002,and

Logper-CapitaIncome

Source: Authors calculations.


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Te ird elemen i increaing reurn o capi-

al a low iniial capial per peron (and low income per

peron):

An economy wi wice e capial ock per peron

mean an economy wi road a work e year

round, raer an road a are waed ou eac

rainy eaon; elecrical power a i reliable wen-

y-our our eac day, raer an elecric power

a i poradic and unpredicable; worker wo are

ealy and a eir job, raer an worker wo

are cronically aben wi dieae. Te likeliood i

a doubling e uman and pyical capial ock

will acually more an double e income level, a

lea a very low level o capial per peron. (P. 250)

Sac give e example o a road wi al o e road

paved and al impaable due o miing bridge or

waed ou ecion. Repairing e impaable ecionwould double e leng o road bu would muc more

an double e oupu rom e road. Ti i an example

o a reold efec, in wic e capial ock become

ueul only wen i mee a minimum andard (p. 250).

Te role o oreign aid i o increae e capial ock

enoug o cro e reold level, in wa became known

a e Big Pu: i e oreign aiance i ubanial

enoug, and la long enoug, e capial ock rie u-

cienly o li oueold above ubience Grow

become el-uaining roug oueold aving and

public invemen uppored by axaion o oueold(p. 246). Wiou oreign aid, according o Sac, many

reaonably well governed counrie are oo poor o make

e invemen o climb e r ep o e ladder.

Even beore eing i ypoei, i i wor no-

ing a ee idea are no new. In ac, ey were par o

e ounding idea o developmen economic in e 1940

and 1950 and developmen economi ued em o in-

i oreign aid wa neceary or economic grow en,

ju a Sac doe now al a cenury laer. Aer $568

billion in aid o Arica combined wi e coninen eco-

nomic agnaion over e pa our decade, combined

wi e ucce o poor counrie geing muc maller

amoun o aid a a percen o eir income in Ea Aia,

3 UN Millennium Project Report, Investing in Development:

A Practical Plan to Achieve the Millennium Development Goals:

Main Report(Unied Naion Developmen Program, 2005), p. 34.

4 Likewie, many o e criicim o aid in my work draw

on inig r aed in e 1960 and 1970, mo noably by

Lord Peer Bauer.

one mig ave oug a lile kepicim wa in order

beore repeaing e idea o e 1950.

Given e publiciy a ee revived, old idea

abou oreign aid are receiving, le u e e ypoei

o e povery rap and e neceiy o e Big Pu

again e explanaion a counrie proper becaue

o economic reedom. Te povery-rap ypoei would

ay a poor counrie ave low grow and ric coun-

rie ave ig grow, o ere would be a poiive ao-ciaion beween iniial income and grow. Ti poiive

aociaion ould old up wen we conrol or weer

e counry i reaonably well governed (uc a we-

er e governmen aciliae economic reedom). So I do

a regreion combining economic reedom wi iniial

income; a beore I need o inrumen or economic ree-

dom o addre poible revere caualiy. A ig value o

(e average level o) economic reedom relaive o iniial

income indicae a income poenial i ig (i e eco-

5 Aar Kraay and Claudio Raddaz ave recenly eed di-

recly weer e aving and increaing reurn mecanim

old in e daa (ee Aid, Poverty raps, and Growth [World

Bank Policy Reearc Paper 3631, 2005]). Tey poin ou a

aving would ave o ollow an S-curve o generae a povery

rap, r increaing lile wi income, en increaing eeply,

en aening ou again. Tey rejec e S-curve in e daa

on aving and per-capia income. Tey alo ail o nd evidence

o e ecnological non-convexiie a alo are neceary o

creae e povery rap. Tey conclude ere i lile evidence

or a povery rap baed on ee mecanim.

Table2.2:TestoPoverty-TrapandEconomic-Freedom

HypothesesorEconomicGrowth

Instrumentalvariables

regression

Dependentvariable:per-

capitagrowth,

Economic reedom in the world,averaged over

.(.3)*

Log o initial per capita income .(.)*

Constant .(.)

Observations

Sargan overidentifcation test:

p-value

.

First-stage F-statistic on

excluded instruments

.3

* signifcant at %; ** signifcant at %

Instruments or economic reedom: distance rom equator,British, French, Socialist, or German legal origin


7/13


nomic-reedom ypoei i correc) compared o acual

income and o would predic aer grow.

Te reul are own in able 2.2. Te povery-rap

ypoei loe ou deciively o e economic-reedom

explanaion a o wo proper. Acually, iniially poor

counrie growasteran ric one, once you conrol or

economic reedom.

Wa abou e role o oreign aid in launcing e

grow ou o povery? Doe a Big Pu o oreign aid

lead o grow? Tere i a uge empirical lieraure on or-

eign aid and grow, wi e lae verdic being a or-

eign aid doe notave any meaurable impac on grow.

I go back o e well one more ime o ee ow aid ow a-

ec e imple ypoei eing inroduced in able 2.2

In able 2.3, I add oreign aid received a a raio o

Gro Naional Income o e recipien a an explanaory

variable. Once again, ere i e problem o revere cau-

aliy. I ue e log o populaion ize a an inrumen or

aid, aking advanage o a quirk in e e aid yem uca mall counrie receive large are o eir income

a aid, unrelaed o eir economic perormance or need.

Inrumening or wo rig-and-ide variable a once

lead o more complicaed problem o idenicaion and

weak inrumen, o le u rea i exercie a illura-

ive raer an deniive.

Conrolling only or iniial income and no or eco-

nomic reedom, aid a no ignican efec on economic

grow. Once you conrol or economic reedom, aid a

a negaive and ignican efec on grow. I am eian

o re i reul oo rongly, a e previou liera-ure a generally ound a zero efec o aid on grow,

no negaive. Muc greaer robune eing i needed

beore e negaive reul can be aken oo eriouly, and

e problem o weak inrumen alo need muc more

examinaion. A e very lea, owever, i illuraive

exercie i conien wi e previou lieraure a aid

doe no ave apositive efec on grow.

6 Ti conradic a reul by Sac in Te End o Poverty

(p. 320), wo owed a lack o a imple correlaion beween eco-

nomic reedom and grow. He orgo o conrol or i own

ypoei o a povery rap by including iniia l income.

7 See e urvey in W. Eaerly, Can Foreign Aid Buy

Grow?, Journal o Economic Perspectives, 17, 3 (Summer

2003), pp. 2348, a wel l a W. Eaerly, R. Levine and D. Rood-

man, New Daa, New Doub: A Commen on Burnide and

Dollar Aid, Policie, and Grow [2000],American Econom-

ic Review, 94, 3 (June 2004), pp. 77478. For e lae ake on

i lieraure, ee Raguram G. Rajan and Arvind Subrama-

nian,Aid and Growth: What Does the Cross-Country Evidence

Really Show?, (NBER Working Paper 11513, Augu 2005).

3 Hayek and the iPod: Why a World of

Uneven and Unpredictable Economic

Success Needs Economic Freedom

Wa e collecivi viion alway mie i a uccei rare, ailure i common. Economic ucce i alway

very uneven and unpredicable, acro almo any poi-

ble uni o analyi one mig conider. Economic ree-

dom permi e decenralized earc or ucce a i

e allmark o ree marke. I i eldom known in ad-

vance wa will ucceed. Many ouand o earcer

moun myriad o diferen rial a o wa will pleae

conumer. A ree-marke yem give rapid eedback a

iPod i a rademark o Apple Compuer, Inc., regiered

in e Unied Sae and oer counrie.

9 A very ougul and eneraining dicuion o i eme

i in Virginia Porel, Te Future and Its Enemies: the Growing

Confict over Creativity, Enterprise, and Progress (oucone,

1998). Se ree a dicoomy beween ai and dyna-

mim a i relaed o e dicoomy ere beween collec-

ivim and reedom. Anoer inigul reamen o e

need or economic reedom in a dynamic world i Brink Lind-

ey,Against the Dead Hand: Te Uncertain Struggle or Global

Capitalism (Wiley, 2002).

Table2.3:Per-CapitaGrowth19602002asFunction

oAid,InitialIncome,andEconomicFreedom:

InstrumentalVariablesRegressions

Regression Regression

Aid/GNI - .(.3)

.3(3.3)**

Log o initial income, .(.)

.(.)**

Economic Freedom in theworld, averaged -

.(.)*

Constant .(.)

.(.)

Observations

Sargan overidentifcation test

p-value

.

* signifcant at %; ** signifcant at %

Instrument or aid: Log o population in

Instruments or economic reedom: distance rom equator,

British, French, Socialist, or German legal origin


8/13


o wic produc are ucceeding and wic are no, and

earcer adju accordingly. Toe aciviie a ucceed

arac more nancing and more acor o producion o

a ey can be caled up enormouly; oe aciviie

a ail o pleae conumer are diconinued. Planner

don ave a earc-and-eedback menaliy; raer, ey

implemen a preconceived noion o wa will work and

keep implemening i weer i i working or no.

Economic ucce orie are oen unexpeced and

unprediced. MP3 player were invened everal year ago

and eemed o ofer grea promie a a grea new way

or muic lover o lien o large amoun o eir avor-

ie muic. Depie i promie, none o e early MP3

player caug conumer ancy. (I wa an early adop-

er, buying one o ee a a ig price o I could ee i

die quickly.) Apple Compuer, Inc., wa known mainly

or i range ailure in e PC marke. I wa a urprie

wen Apple Compuer uddenly ound a uge i in e

iPod mobile digial device, wic a o Marc 2006 ad78% o e marke or MP3 player. So ar, Apple a old

50 million iPod. Te macing iune0 applicaion pro-

gram or elling ong on-line via down-load o an iPod

accoun or 87% o e legal muic download in e

Unied Sae.

Ray Kroc wa a aleman in e 1950 peddling

Mulimixer, a macine a mixed ix milk ake a a

ime. Hi original idea wa o ell a many Mulimixer

a poible. In 1954, e viied a reauran called Mc-

Donald in San Bernadino, Caliornia. He noiced a

e McDonald broer kep eig Mulimixer operainga ull capaciy around e clock. A r, e waned o

recommend eir meod o i oer clien, increaing

e demand or i Mulimixer. Bu en e canged i

mind: e aw a preparing amburger, rie, and milk

ake on an aembly line wa a way o run a ucceul

cain o a-ood reauran. He orgo all abou Muli-

mixer and e re i Golden Arce recing a ar a

e eye can ee. How many Ray Kroc a oreign aid

lo by i empai on Plan?

Many conumer marke in e Unied Sae are

imilarly dominaed by a mall number o ucceul

20 iune i a rademark o Apple Compuer, Inc., regiered

in e Unied Sae and oer counrie.

2 Apples Music Biz, iPod Share Grows [ic], April 20, 2006,

.

22 Ti ory i aken rom William Duggan, Te Art o What

Works: How Success Really Happens (McGraw Hill , 2003).

brand. Te Coca-Cola and Pepi-Cola companie oge-

er ave 75% o e American marke or carbonaed o

drink. Dr Pepper/Seven Up i in ird place wi anoer

15%. Te remaining 10% o e marke i pli up among

a large number o muc maller rm. Caual oberva-

ion ugge many example o brand dominance: Mi-

croo, Sarbuck, Amazon.com, Border, Barne and

Noble, and o on. Wile brand dominance may reec

many acor abou indurial organizaion, i alo ow

e incredible unevenne o produc ucce aociaed

wi paricular rm (a we will ee in a minue), perap

reecing e kind o erendipiy illuraed by e iPod

and McDonald .

Te uneven ucce o produc i cloely relaed

o e uneven ucce o rm. Ju 0.3% o rm in e

Unied Sae accouned or 65% o all rm ale in 2002.

Firm ize i well known o ollow Zip law (alo known

a a power law), in wic e log o e ize i a negaive

linear uncion o e requency o i ize occurring(or equivalenly e rank). Power law ave generaed a

lo o ype; or e purpoe o i paper, i i enoug o

poin ou ow large-cale ucce i rare, wile ailure i

common. In oer word, e requency diribuion o

rm (or waever uni we are inereed in) a a a and

long rig-and ide ail, o wic ere are many pecial

cae uc a a log-normal diribuion and a power law

(Pareo diribuion). In oer word, mo o e diri-

buion i concenraed a ome mediocre level, en ere

are a mall number o rm a are ju oally of e

carway above wa omeing like a andard bellcurve would predic.

Even oug large rm dominae e markeplace,

i i no o eay o be a large rm. O e world large

100 companie in 1912, ome like Procor & Gamble and

Brii Peroleum were many ime larger in 1995. How-

ever, ey were e excepion, a 1912 big 100 rm alo

included uc dinoaur a Cenral Leaer and Cuday

Packing in e Unied Sae. Only 19 o e op 100 in

23 1997 op-10 So Drink Companie and Brand, Ediori-

al,Beverage Digest(February 12, 1998), . Daa reer o 1997.

24 US Small Buine Adminiraion, Oce o Advocacy,

Firm Size Data: Statistics o U.S. Businesses and Nonemploy-

er Statistics [2003], .

25 Lada A. Adamic, Zip,Power-laws, and Pareto - a ranking

tutorial(Inormaion Dynamic Lab, HP Lab), , i a

elpul primer on power law.


9/13


1912 were ill in e op 100 in 1995, and 48 o 1912 big

100 ad diappeared alogeer by 1995. Buine book

lay ou e ecre or ucce o a ew large companie

celebraed by e auor, only o ee e rm all upon

ard ime aer e book i publied. Buine wri-

er celebraed Enron or i innovaive approac rig

up o e la minue. Even e mo ucceul bui-

ne guru ave eir embarramen: om Peer 1982mega-be-eller,In Search o Excellence, included among

i celebraed companie ome a would laer go bank-

rup uc a Aari Corporaion, Wang Laboraorie, and

Dela Air Line.

Te diculy o acieving and mainaining ucce

i no peculiar o large rm. Every year abou 10% o ex-

iing rm o all ize go ou o buine. No a i i

o eay o ar a new rm o replace e one a go ou

o buine. More an al o new rm ail wiin our

year o e ounding in e Unied Sae.

26 Paul Ormerod, Why Most Tings Fail: Evolution, Extinction,

and Economics (Paneon Book, 2005).

27 Ormerod, Why Most Tings Fail.

2 Amy E. Knaup, Survival and Longeviy in e Buine

Employmen Dynamic Daabae,Monthly Labor Review 128,

5 (May, 2005), pp. 5056; Brian Headd, Redening Buine

Succe: Diinguiing beween Cloure and Failure, Small

Business Economics, 21, 1 (Augu, 2003), pp. 5161.

Te economic ucce and ailure o individual i

alo well known o ollow e ame kewed endencie. Te

diribuion o individual income wiin counrie generally

ollow a log-normal diribuion or mo o e range o in-

come (covering 9799 percen o individual), wi a power

law covering e upper 13 percen o income earner.

Moving o inernaional daa, economic develop-

men i o coure pecacularly uneven acro counrie,a well a acro ime. Obervaion o ig average in-

come are conned o a ew counrie in recen period,

wi large par o e world and large par o uman

iory bere o i kind o ucce. I we rea ober-

vaion on all counrie or e ime period 1820, 1870,

1913, 1950, and 2001 a eparae developmen experience,

and rank em rom ige o lowe income, we ge e

grap own in Figure 2.3.0 A mall minoriy o epiode

aain very ig income bu i all of almo verically

a we move down e rank.

29 Ti aemen i baed on F. Clemeni and M. Gallegai,

Pareo Law o Income Diribuion: Evidence or Germany,

e Unied Kingdom, and e Unied Sae, in A. Caerjee.,

S. Yarlagadda, and B.K. Cakrabari, Econophysics o Wealth

Distributions (Springer-Verlag Ialia, 2005), pp. 314). Digial

verion available a .

Ti aricle alo provide a nice ummary o e lieraure.

30 O coure, ee developmen experience are no indepen-

den obervaion acro eier ime or pace.

Figure2.3: Per-capitaIncomebyRankoDevelopmentExperience

Note: Per-capita income in pooled cross-country sample, , , 3, .

Source: Angus Maddison, The World Economy: A Millennial Perspective (Organisation or Economic Cooperation and Development, ).


10/13


ManuacturingExportsperCapita

An indicaor o developmen a ow even greaer vari-

aion acro counrie i manuacuring expor per cap-

ia. Ti reec many diferen acor: e raniion

rom agriculure o manuacuring a counrie develop,

e many acor a inuence openne o inernaional

rade and compeiivene in inernaional marke, e

graviy model o rade ow, and o on. A ome more ba-

ic level an a a rade indicaor, owever, manuacuring

expor reec omeing a all counrie can poen-

ially do, and ey are all compeing in e ame global

markeplace. A an indicaor, i alo a e advanage o

being evaluaed a world marke price, unlike naional

income wi diferen domeic price, wic are noori-

ouly dicul o compare. Moreover, manuacuring ex-

por are overwelmingly dominaed by e privae ecor

and ace a marke e, unlike ome o e componen o

GDP, uc a a large governmen ecor a i meaured

a co raer an according o e value a individu-al place on i. Succe a exporing manuacure range

all e way rom Singapore over $25,000 per capia o

Burundi 2 per capia (able 2.4).

Waever e advanage and diadvanage o

manuacuring expor a a meaure o ucce, manuac-

uring expor per capia are emelve igly correlaed

wi e log o per-capia GDP, a own in Figure 2.4. No

only i manuacuring expor ucce iel pecacular-

ly uneven acro counrie, i i alo very uneven wiin

eac counry acro produc caegorie. Daa i available

on manuacuring expor a e 6-digi produc-cla-icaion level. Counrie expor a many a 2,236 di-

eren manuacuring produc, wi e average in e

ample being 1,177 (able 2.5). Te op ree ou o i

array o produc accoun, on average, or 35% o expor

value, wile e op 1% o produc accoun or over al

o expor. Te diribuion o expor value acro prod-

uc i log normal, wi e value wiin e op 20% o

produc (accouning or 94% o expor value) ollowing

a power law.

In oer word, e big diference beween Ireland

and Burundi (bo mall populaion, wi Burundi larg-

3 Te work on manuacuring expor per capia draw on join

work wi Ariell Ree and Julia Scwenkenberg.

32 Singapore and Hong Kong expor number are unuual

in a ey involve ignican re-expor.

33 See William Eaerly, Ariell Ree, and Julia Scwenken-

berg, Expor Specializaion and Economic Developmen, un-

publied manucrip, New York Univeriy (2006).

er) i no a Ireland perorm beer on everying, bua i ound ree manuacuring expor produc (par

and acceorie o daa proceing equipmen, monoliic

inegraed circui excep digial, and ound recording

oer an poograpic produc) a earned i $15 bil-

lion, wile Burundi op ree (auomobile park igniion

engine o 15003000 cc, ee/ile and abeo/celluloe

bre cemen, and corrugaed ee o abeo/celluloe

bre cemen) earned i $151,000.

How do you acieve large-cale ucce on a ew

produc? Again i i economic reedom a oer uc-

ce, nding e paricular nice in inernaional markewere e counry can acieve enormou cale in expor.

Burundi a one o e world wor core on econom-

ic reedom, wile Ireland a one o e be. Economic

reedom i igly correlaed wi manuacuring expor

per capia (Figure 2.5). Wen we addre caualiy by u-

ing e ame inrumen a above or economic reedom,

we ill nd a economic reedom predic ucce a

manuacuring expor.

Wy i economic reedom o conducive o large-

cale manuacuring expor and o developmen in gen-

eral? Wy do planner ail o badly? In a world o grea

uncerainy and unpredicabiliy, economic reedom uc-

ceed or e ollowing reaon.

34 Te yperpecializaion o expor wa previouly poined

ou by Ricardo Haumann and Dani Rodrik, Economic De-

velopmen a Sel-Dicovery, unpublied manucrip, Har-

vard Kennedy Scool o Governmen (April 2003). Ti work

inpired e exercie wi expor ere.

Figure2.4: Logper-CapitaIncomeandLog

ManuacturingExportsperCapita



11/13


Table2.4: RankingoCountriesbyManuacturingExportsperCapita(Manexppc)

Exporter Manexppc Rank Exporter Manexppc Rank Exporter Manexppc Rank

Singapore $,33. Cyprus $. Venezuela $3.

Hong Kong $3,3. Kuwait $. Bolivia $3.

Ireland $,. 3 Philippines $. Peru $3.

Belgium $,3. Tunisia $3. 3 Bangladesh $3.

Luxembourg $,. Swaziland $3. Rep. o Moldova $3. 3Switzerland $,. Greece $3. Panama $.

Netherlands $,33.3 Barbados $3.3 Kazakhstan $.

Sweden $,. Belarus $3. Madagascar $.

Malta $,.3 Romania $. Ecuador $.

Macao $,.3 Macedonia $. Egypt $.

Denmark $,.3 Latvia $3. Armenia $.

Finland $,3.3 Bulgaria $3. Cote dIvoire $.3

Germany $,3. 3 Fiji $. Zimbabwe $.

Austria $,. Antigua $. 3 Georgia $.

Canada $,.3 Turkey $. Zambia $. 3

France $3,. Polynesia $. Turkmenistan $.3

Japan $3,. Lesotho $. Gabon $.

United Kingdom $3,33. Trinidad $.3 India $.

Slovenia $,3. South Arica $. Kyrgyzstan $.

Italy $,. Argentina $. Honduras $.

Malaysia $,.3 Jordan $.3 Nepal $.

Rep. o Korea $,. China $3. Azerbaijan $.

Israel $,. 3 Uruguay $3.3 Suriname $.

Hungary $,3. Morocco $.3 3 Iran $.

USA $,. Brazil $3. Paraguay $. 3

Czech Rep. $,. Maldives $.3 Papua New Guinea $.

Norway $,.3 Indonesia $. Senegal $.

Spain $,. Saudi Arabia $.3 Kenya $.

Estonia $,. Botswana $3. Cuba $.

Portugal $,. 3 Belize $. Niger $.

Slovakia $,.3 3 Russia $.3 Nicaragua $.

Mexico $,. 3 Serbia $. Ghana $3. 3

Qatar $,.3 33 St Vincent $. Togo $. 3

Mauritius $. 3 Jamaica $. 3 Sudan $. 3

Bahamas $. 3 Cambodia $. Algeria $. 33

Costa Rica $. 3 Ukraine $.3 Gambia $. 3

New Zealand $. 3 Chile $.3 Mali $.3 3

Thailand $.3 3 New Caledo. $. Burkina Faso $.3 3

Bahrain $. 3 El Salvador $. Mozambique $. 3

Australia $. Saint Lucia $3. Comoros $. 3Croatia $3. Greenland $. Uganda $. 3

Iceland $. Colombia $. Guinea $.

Lithuania $3. 3 Albania $. Benin $.

Saint Kitts $. Lebanon $. 3 Central Ar. Rep. $.

Poland $. Cape Verde $. Tanzania $. 3

Andorra $. Mongolia $.3 Sao Tome $.

Oman $. Guatemala $3.3 Nigeria $.

Grenada $. Namibia $. Ethiopia $.

Dominica $. Guyana $3. Burundi $.


12/13


(1) Tere i a remendou diculy in knowing wa willucceed. Economic reedom oer compeiion and mul-

iple aemp o nd ing a work, and weed ou e

many ailure. Aer a wile, e economy coni mo-

ly o e big uccee, wic aciliae a ig andard

o living. Planner canno ave enoug knowledge o e

complexiie o ucce; moreover, ey ufer rom e

deluion a ey already know e anwer.

(2) Economic reedom give marke, wic are grea

eedback mecanim or learning wa i ucceeding and

wa i ailing. Cenral planning lack eedback

() Economic reedom rulely reallocae reourc-

e away rom wa i ailing oward wa i ucceeding.

Planning bureaucracie ave deparmen a eac con-

iue a veed inere reiing reallocaion.

() Economic reedom make i poible o increae e

cale o a ucceul aciviy rapidly and by a uge mag-

niude. Financial marke allocae und o nance an ex-

panion in cale and e organizaional orm o e corpo-

raion permi replicaion o e ame aciviy a worked

on a mall cale on a muc larger cale. Financial marke

and corporaion require economic reedom o uncion

well. Planning bureaucracie eldom ow muc exibil-

iy in expanding ucceul aciviie on a large cale.

() Economic reedom make poible opiicaed

conrac a allow individual and rm o deal wi

uncerainy. Given e rariy o ucce and e likeliood

o ailure, individual and rm will only be willing o

be on nding a big i i ey ave e abiliy o diveriyrik and are proeced again caaropic conequence

rom ailure. Limied liabiliy in corporaion, bankrupcy

law, and nancial marke elp acieve ee ak in e

world aped by economic reedom. Rik-avere planning

bureaucracie op or low-rik, low-reurn aciviie.

IndividualFreedomandProgress

Te idea a individual reedom lead o more progre

an ae planning i no new. I i par o a long inellec-

ual radiion oppoing op-down collecivi engineering

in avor o boom-up earcing or oluion a goeback o Adam Smi and Edmund Burke. F.A. Hayek pre-

cienly noed more an 60 year ago ow e complexiy

o knowledge required economic reedom and made plan-

ning impoible. A repreenaive quoaion i:

Te ineracion o individual, poeing diferen

knowledge and diferen view, i wa coniue

e lie o oug. Te grow o reaon i a o-

cial proce baed on e exience o uc difer-

ence. I i o eence a i reul canno be pre-

diced, a we canno know wic view will ai

i grow and wic will noin or, a i

grow canno be governed by any view wic we

now poe wiou a e ame ime limiing i. o

plan or organize e grow o mind, or or a

maer, progre in general, i a conradicion in

erm Te ragedy o collecivi oug i a,

wile i ar ou o make reaon upreme, i end

by deroying reaon becaue i miconceive e

proce on wic e grow o reaon depend

Table2.5: Specialization:ShareoNumberoProducts

at6-DigitLevelIndicatedinTotalManuacturingExport

ValuewithinEachCountry,2004

Variable Averageor

cross-countrysample

Top 3 3.%

Top % .%

Top % .%

Top % .%

Bottom % .%

Average number o products

Maximum number o products 3

Number o countries


Figure2.5:EconomicFreedom19702002andLog

ManuacturingExportsperCapita,2004



13/13


Individualim i u an aiude o umiliy beore

i ocial proce and o olerance o oer opin-

ion and i e exac oppoie o a inellecual

ubri wic i a e roo o e demand or com-

preenive direcion o e ocial proce.

Ti i no o ay a economic reedom i eay o

acieve. Even wen uc principle a privae propery,

reedom o coice o occupaion, proecion again ae

expropriaion, reedom o enry and compeiion in mar-

ke, price deermined by marke and no by ae a are

underood, i i dicul o implemen e principle in

pracice. Tee principle re upon a complex aormen

o ocial norm, inormal nework, ormal law, and efec-

ive iniuion. o e exen a planner underand

ome o ee principle, eir caraceriic miake i

o ry o inroduce everying a once rom e op down

in e el-conradicory combinaion o a marke plan.

(Sac, in an earlier incarnaion, wa e aer o ockerapy or e ex-Communi counrie, wic ried o

do exacly i.) Economic reedom i omeing a can

only grow gradually wiin ocieie, wi a lo o boom-

up earcing or efecive piecemeal reorm by poliical

and economic acorwic elp explain wy ucce a

economic developmen i alo relaively uncommon.

35 F.A. Hayek, Te Road to Serdom (Univeriy o Cicago

Pre, 1944), p. 181.

4 Conclusions

Ala, oreign aid a never been able o ecape i collec-

ivi origin. oday collecivi anaie uc a e Big

Pu o acieve e Millennium Developmen Goal will

ail ju a badly a pa varieie o collecivim. Indeed,

e UN iel repor a ey are already ailing (i cre-

aively ee i a a reaon o olici ye more unding

or e Big Pu). A peek inide e paern o economic

ucce ow e complexiy o knowledge required o

ucceed, wic doom planning efor and make clear

wy economic reedom i o reliably aociaed wi eco-

nomic ucce.

Foreign aid could creae new opporuniie or e

world poore people by geing em ome o uc e-

enial a medicine, educaion, and inrarucure, bu

only i oreign aid iel imiae e ucceul approac o

economic reedom, by adoping a earc and eedback ap-

proac wi individual accounabiliy inead o e cur-ren collecivi planning model. Even wi ee cange,

ouide aid canno acieve e grandioe goal o ran-

orming oer ocieie o ecape povery ino proper-

iy. Only ome-grown gradual movemen oward more

economic reedom can accompli a or e world

poor. Forunaely, a i already appening.

13 easterly freedom versus collectivism in foreign aid bc

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