29 December 2008

Target outcomes, not economic variables

Reading the excellent Bad Samaritans: the guilty secrets of rich nations and the threat to global prosperity, by Ha-Joon Chang, it becomes clear that many of the assumptions underlying development theory have no basis in fact. All too often we accept, with little evidence, assertions that, for example, Foreign Direct Investment is good for a country's development prospects. But:
Not only is FDI not necessarily a stable source of foreign currency, it may have negative impacts on the foreign exchange position of the host country. FDI may bring in foreign currency, but it can also generate additional demands for it (eg importing inputs, contracting foreign loans). Of course, it can (but may not) also generate additional foreign currency through exporting, but whether it will earn more foreign exchange than it uses is not a foregone conclusion. (Page 89)
More FDI, like a lower rate of inflation (also discussed by Chang) is not an unmitigated blessing. Like a host of other variables such as economic growth itself, explicitly or implicitly targeted by governments in the rich and poor countries, they are imperfect indicators, that may have been highly correlated to societal well-being in some countries at some points in the past, but that are not always inevitably so. In a complex and interdependent world, there are too many other variables, time lags and other confounding factors that make targeting of anything other than outcomes problematic - as Chang illustrates throughout his book. And that is assuming that those doing the targeting on behalf of others (in Chang's book: the World Trade Organization, the IMF and the World Bank on behalf of the developing countries), are well meaning.

Social Policy Bonds would be a radical change in that they would target and reward the achievement of social and environmental goals themselves. Much work has been done, for example, on the Human Development Index, which, with a bit of tweaking could be targeted by governments in the poor and rich countries, or philanthropic groups. A modified HDI would be inextricably correlated with social well-being, and under a bond regime people could be rewarded for raising it however they did so. This would be a stark contrast with they sometimes cynical, often ideological and generally failed policies of Chang's Bad Samaritans.

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