Tuesday, November 20, 2012

Endogeneity & Furiousity

This morning, Tim Harford tweeted me over to this post by Owen Barder, along with the message that it,  "should make me furious".

It didn't.

The post complains that, "we (the US) waste our food aid budget". It shows that, in 2010, We sent $5 million in official food aid to Cambodia, but $3.5 million of that was actually paid out to US shippers.

The implication is that we have a fixed food aid budget that is exogenous, and if we could just stop wasting it on shipping (by sourcing the food closer to Cambodia, for example) the aid would be more effective.

Another way to look at the situation though, is to realize that the food aid budget is actually endogenously created in the sausage factory that is Congress.

US shippers and farmers aren't going to lobby for a food aid budget if they don't benefit from it. If shippers and farmers don't lobby and give contributions then the food aid budget will be smaller.

How much smaller? That of course is an empirical question, but given that Cambodians don't vote or lobby (as far as I know at least), zero is not a crazy guess as to the size of the food aid budget without the support of US shippers and farmers.

After all, when you ask the American people where to cut the budget, their first instinctive thought is "foreign aid", which many on them imagine is a large chunk of US expenditures instead of the pittance that it is.

Why does the OECD allow these freight costs to be counted as "aid"? That is a separate question, but in the elaborate kabuki dance of special interest money, it appears to be necessary that money flows not be plainly labeled.

A budget item simply giving money to shippers and farmers is perceived as unlikely to survive, so we call it aid and our pals go along with it. Either because other countries are doing the same thing, or because the OECD knows that calling a spade a spade might end up reducing, rather than increasing the actual amount of aid that is delivered.

We all know that the most effective use of $5 million in aid money is to simply give the money to the people who need the aid. The best our political system can do is, from the $5 million, get $1.5 million in in-kind aid delivered. And then of course the political system of the receiving country takes over, so the amount that actually gets to the intended recipients is going to be a fraction of that measly $1.5 million.

Yet we as a people continue to demand that our political system run more and more of our economy.


Anonymous said...

This is a great nutshell public choice take on aid programs.

Owen Barder said...

You are right, of course, that the choice of overall aid budget, and within that food aid, is endogenous, and determined by the political economy of public choice.

But I do not agree that this is necessarily 'the best our political system can do', for three reasons.

First, overall aid spending may not be entirely determined bottom up, even in America. The situation in the US is certainly different from many European countries, in which the overall aid budget is determined first, and the allocation second. But I doubt if US policy-makers are completely indifferent to how generous the US is perceived to be; and if the public is completely indifferent to a sense of how much aid, overall, it is 'right' for the US to give. So perhaps cutting a 'bad' aid program in one part of the budget may create room, over time, for a better aid program elsewhere.

Second, we do not know if we are at the feasibility frontier of politically acceptable aid decisions. We can agree that aid decisions are constrained by pressures from political interests, but that does not necessarily mean that we are always at the optimum. In Denmark until recently it used to be said that the generous aid budget was sustainable only for as long as it was tied to Danish suppliers. Denmark has nonetheless gradually untied aid - dairy products in 2003, technical cooperation in 2006, etc. Danish aid has continued to rise to 0.9% of GNI, suggesting that the concerns about continued support for aid if it was untied were overstated.

Third, this kind of pressure - blog posts and people tweeting that it should make you furious - is part of the endogenous pressure which changes the equilibrium. If it becomes clear to more policymakers that people who care about development are furious about this, that may make them tie a little less in future. Saying that this is just an inevitable consequence of the political economy is like setting sail in a boat and then refusing to steer on the grounds that we must be carried by the wind and the tide.

Paul Harvey said...

This is essentially the argument made by the big US NGOs that programme a lot of US tied food aid - 'bad food aid is better than no food aid'. I've never been convinced because that just perpetuates a bad system. It's also worth noting that, at the margins, there have been some important changes in US food aid policy to allow more local procurement.

Jeremy Konyndyk said...

The presumption that Shippers and farmers are the bulwark of political support for this is wrong on two counts. First, US funding for food aid commodities has dropped by nearly $1bn since 2009, suggesting that they shippers and farmers either aren't fighting that hard for this account or don't have that much influence over it.

Second, US NGOs have been lobbying for years to alter this approach and have been making some headway - US funding for local and regional purchase is going up, though not (yet) to levels we'd like to see. Progress in the US political system tends to be incremental, not sweeping, and that is what we are seeing on this issue.

To the question of whether to be outraged - the rules on shipping are probably the most wasteful aspect of a generally inefficient system - they mandate that food must be shipped on US flag carriers, effectively allowing a cartel to charge higher shipping prices than could be obtained on the open market. This could be fixed without seriously undermining the political support for these funds.

So, do feel free to be outraged by this.