JSIS B 331| Political Economy of Development | Spring 2013

NAME(s): Justin Loustau

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Final Assignment

Due by 5 pm on Friday 14 June 2013___________________________________________________________________________________

Instructions

1. Please type your answers into this document!

2. Save as Word document or as PDFName the file JSIS B 331 – Spring 2013– [lastname, firstname]

3. Go to the dropbox

4. Please download your submission by 5 pm on Friday, 14 June 2013. The dropbox closes at that time. No late submissions will be accepted.

5. You can complete this final assignment in small groups (of not more than 3 students). If you do please make sure to include all your names above. Only ONE student has to submit it on behalf of the group, it doesn’t matter who submits the assignment.

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What is a CMU?

Note: a COURSE MATERIAL UNIT is one article (e.g. Romer) or one book chapter from our readings (e.g. any chapter from Acemoglu and Robinson, Olson, The Dictator’s

Handbook, or Poor Economics counts as one CMU.)__________________________________________________________________________________________

This assignment has 5 parts Please read the instructions carefully!!

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Part I: The Leaky Bucket

Explain clearly and in your own words why the challenge of providing aid or assistance to poor people in poor countries could be compared to a ‘leaky bucket’. Write a short essay of 300 words or less. Refer to at least 3 CMUs.

The numerous transaction costs associated with sending aid money through principal-agent chains leads to significant reductions in the amount of aid obtained by the final recipient. Each one of these transaction costs can be seen as a “leak” in the “bucket” of aid being given to a respective country, organization, or group.

The concept of the leaky aid bucket and its corresponding principal-agent chain is perfectly outlined in Yue Wang’s Time Magazine article, It Takes a Smuggler to Satisfy KFC Cravings in Gaza. Wang describes the way in which Gazans order Kentucky Fried Chicken from Rafah, Egypt, and have it delivered to them via a handful of intermediaries. At each step in this long delivery chain, a bribe (to Egyptian border officials or Hamas tunnel supervisors) or payment (to another deliverer) is exchanged with a guarantee that the chicken will make it one step closer to the final recipient in Gaza. The costs associated with satisfying each middleman in the chain are astronomical—the price for one bucket of chicken is $27.

Unfortunately, many of the international aid community’s resource allocation trends follow the KFC in Gaza model. NGOs, development foundations, and large global international aid organizations like the UN, WHO, and World Bank distribute their aid dollars through a complex network of intermediaries, each of which take a portion of that funding to pay for administrative costs, and at times, make a profit (Banerjee & Duflo 22). In addition, a large proportion of aid money tends to be kept within a small-coalition regime’s group of essentials. As Olson notes when describing “stationary bandits,” autocrats only distribute the bare minimum of public goods to their constituents (Olson 8).

Placing aid and development dollars in the hands of rulers who are incentivized to keep their populations powerless will result in very little societal change. The allocation of aid to relatively undemocratic states not only introduces another leak in the aid bucket, but also creates a never-ending cycle of foreign aid in which the objectives of the donor fail to be achieved as rulers continue to get “free” money from the west (Bueno de Mesquita & Smith 252). For these reasons, reducing transaction costs is one of the main objectives of new development schemes. The dawn of microfinance and organizations such as Kiva mark clear attempts to limit the leakiness of the aid bucket while increasing accountability and achieving development goals.

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Part II: The Bauer Paradox

The Hungarian/British development economist Peter Bauer (Baron Bauer of Market Ward) is known for formulating the Bauer Paradox about development assistance:

“Aid is most likely to work well in countries that don’t need it anyway.”2

Write a short essay of 300 words or less explaining this paradox. Refer to at least 3 CMUs.

Organizations dedicated to aid and development often use their perceptions of poverty, hunger, health, etc. in the developed world as a basis for their interventions in the developing world. As Banerjee, Duflo, Bueno de Mesquita, and Smith note in their respective texts, and Bauer states in his paradox, many development organizations implement foreign aid schemes that appear to be common sense to those in the Global North, and yet fail massively upon their introduction in the Global South (Banerjee & Duflo 10) (Bueno de Mesquita & Smith 260).

In Poor Economics, Banerjee and Duflo spend the first half of their text identifying poverty traps with respect to hunger, health, education, and sexual health that continue to plague populations around the world despite numerous targeted interventions orchestrated by those in the developed world. The authors argue that only after identifying and targeting the poverty traps associated with these sectors of society will populations be able to ultimately escape poverty (Banerjee & Duflo 10).

In The Dictator’s Handbook, Bueno de Mesquita and Smith describe the ineffectiveness of Western aid as much of its distribution relies on effective roads and grid systems (Bueno de Mesquita & Smith 185). In reality, such organizational structures do not often exist within the developing world, as limited access orders and their autocrats are seldom incentivized to provide public services such healthcare clinics, road networks, etc. to their respective populations (North, Wallis, & Weingast 18).

Bauer’s paradox highlights the way in which innovative thinking is required to end world poverty, not just the use of recycled policies and strategies used in the developed world to alleviate social and economic issues. One effective way of developing more insightful aid strategies would be to deconstruct the principal-agent model of aid, and identify not only the actual needs of people within a given population, but also the most effective ways to achieve those goals given the country’s social, political, and economic context.

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Part III: Create Your Own Policy Recommendation

For this part, please re-read the following three final chapters from our course books:

From The Dictator’s Handbook, Chapter 10, “What Is to Be Done?” From Poor Economics, Chapter 10 (“Policies, Politics”), and the final part

titled “In Place of a Sweeping Conclusion”

In 400 words or less, please create a policy recommendation for a donor government or a development organization that incorporates suggestions and ideas from both books.

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Use at least two direct quotes with page numbers, from each of the three final chapters to support your recommendation (i.e. at least six direct quotes in total)

What follows are three sets of policy recommendations for a donor government incorporating suggestions from Poor Economics and The Dictator’s Handbook.

1. It is critical to recall the lessons learned from previous attempts to eliminate global poverty. As Banerjee and Duflo note in “Policies, Politics”, “the gap between intention and implementation can be quite wide” (Banerjee & Duflo 215), and many projects result in unintended consequences. In an effort more effectively intervene in the future, research and localized studies that “shift [their focus] from INSTITUTIONS in capital letters to institutions in lower case—the ‘view from below’” are essential (Banerjee & Duflo 220). Only after identifying the informal institutions that truly shape peoples’ lives will effective aid benchmarks be made.

2. Successful development requires that poverty traps be identified and relieved by foreign development institutions. In “In Place of a Sweeping Conclusion”, Banerjee and Duflo write, “the poor bear responsibility for too many aspects of their lives... The richer you are, the more the ‘right’ decisions are made for you” (Banerjee & Duflo 245). In relieving the poor of these daily “decisions,” essentially “making it as easy as possible to do the right thing” (Banerjee & Duflo 245), widespread entrepreneurialism, and the growth that accompanies it, can be achieved.

3. Ultimately, effective aid targets the needs of the poor in a particular area while remaining cognizant of the broader political and economic climates in the country and region of focus. Bueno de Mesquita and Smith comment on this political and economic context, noting in “What is to be Done?”, that it is important to be “suspicious of [leader’s] motives… [as] appeals to ideological principles and rights are generally a cover…” (Bueno de Mesquita & Smith 348). As a result, it is essential to pursue independent research studying the needs of populations living under small to medium coalition regimes, and provide for them as needed through the alleviation of poverty traps that bypass government control. If a ruler’s claims become so contrary to the lived experience of his constituents, or efforts to alleviate poverty are not welcomed, it is in the interests of the international community to remove the ruler from power by forcing them to choose between trading “the power of office in exchange for the right to the money” (Bueno de Mesquita & Smith 374). Coordinating internationally through organizations including the UN, IMF, World Bank, and ICC/ICJ would make such removals from power a possibility.

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Part IV: At the Bottom – Private Schools in Kenya

For this part please read the following article from The New York Times’ “Fixes” blog:

Tina Rosenberg. “A By-the-E-Book Education, for $ 5 a Month” (22 May 2013)

The article is available from http://nyti.ms/19J41xB

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Write a short essay of about 300 words in which you relate this story clearly to our class materials. Explain the issue very briefly at the beginning of the essay – in your own words.

In your essay, please include clear references to at least three CMUs. You have to include at least one reference to each of the two course books.

Kenya’s public schooling system has deteriorated significantly in recent history. Continual government cuts to education have led to larger class sizes, the hiring of less qualified teachers, and increases in legitimate and illegitimate fees wagered by teachers and local officials on parents. The Bridge International Academy (BIA), a private school costing families just over $5 per month, was established in an effort to provide better schooling to Kenyan children. The highly centralized institution has a group of “master teachers” who design lesson plans, which are then forwarded to local teachers electronically via an e-reader device. The system allows for highly standardized and transparent curricula that increase accountability and contribute to better student learning.

Throughout The Dictator’s Handbook, Bueno de Mesquita and Smith describe public elementary schooling as an essential component of small coalition regimes (Bueno de Mesquita & Smith). These highly regimented programs offer just enough education to make the agricultural workforce productive by teaching children how to speak, count, make use of the life cycle, etc. However, they often fail to emphasize critical thinking and free speech, essentially training individuals as lifelong laborers. Olson’s stationary bandit analysis rings particularly true in this scenario: the Kenyan government is only concerned with gaining the bare minimum tax revenue needed to remain in power and finance the lavish lifestyles of the political elite (Olson 7). Agriculture is a perfect industry for the stationary bandit; it is self-sustaining, requires little schooling, and makes society only slightly productive.

Thus, the rise of BIA, a rigorous independent education alternative that teaches students more than just how to work, clearly poses a threat to the small coalition regime in Kenya and is a perfect example of a way to eliminate one of the classic poverty traps defined by Banerjee and Duflo in Poor Economics: access to quality education (Banerjee & Duflo). An entrepreneur (remember, BIA is a for-profit business) established the company to better educate Kenyan children within the small-coalition regime’s framework. An embodiment of Banerjee and Duflo’s “quiet revolution,” the company has the potential to significantly increase the number of highly educated individuals throughout the country and ultimately contribute to regime change.

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Part V: At the Top – A New Form of Government?

Below you will find five readings on a recent case involving a proposal for new zones of governance in Honduras, the Región Especial de Desarrollo (RED), or ‘Special Development Zone’, a type of ‘charter city’.

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Please write one essay of 500 words or less in which you relate the RED case clearly to our class materials. Explain the issue and the key ideas so they would be understandable to an interested layperson.

In your essay, please include clear references to at least five CMUs. You have to include at least one reference to each of the two course books.

Charter Cities and the Región Especial de Desarrollo (RED) in Honduras

1. Background on Charter Cities (one item)

Brandon Fuller and Paul Romer. “Success and the City: How Charter Cities Could Transform the Developing World.” Macdonald-Laurier Institute. April 2012.

Available online at http://bit.ly/Jz4pUG

2. The RED Plan in Honduras (four items)

a. Adam Davidson. “Who Wants to Buy Honduras?” The New York Times Magazine. 8 May 2012.

Available online at http://nyti.ms/KYmxUj - and will be sent to you by email.

b. “Hong Kong in Honduras.” The Economist. 10 December 2011.

Available online at http://econ.st/11nku3V - and will be sent to you by email.

c. Elizabeth Malkin. “Plan for Charter City to Fight Honduras Poverty Loses Its Initiator.”The New York Times. 30 September 2012.

Available online at http://nyti.ms/Vu7lbq - and will be sent to you by email.

d. World Briefing – The AmericasNew York Times. 18 October 2012.

Available online at http://nyti.ms/SvEm2F - and will be sent to you by email.

Below you will find five readings on a recent case involving a proposal for new zones of governance in Honduras, the Región Especial de Desarrollo (RED), or ‘Special Development Zone’, a type of ‘charter city’.

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Please write one essay of 500 words or less in which you relate the RED case clearly to our class materials. Explain the issue and the key ideas so they would be understandable to an interested layperson.

In your essay, please include clear references to at least five CMUs. You have to include at least one reference to each of the two course books.

In their concluding chapter, Bueno de Mesquita and Smith provide figure 10.1, pictured below (Bueno de Mesquita & Smith Ch. 10).

The graph depicts the size of a country’s winning coalition on the x-axis, and total earnings of each individual within that coalition on the y-axis. The lower the number of essentials in the regime, the greater their respective incomes, and the more impoverished the general population. However, when the number of individuals in the small coalition reaches approximately 27 individuals, the coalition is as wealthy as it was before, and more importantly, citizen welfare is sequal to coalition welfare.

This “swoosh” diagram demonstrates both the inherent difficulty with democratization, and ultimately, the “lumpiness” of development. How, scholars ask, can development be achieved when it requires that the political elite temporarily sacrifice some of their wealth for the betterment of society as a whole?

Paul Romer’s charter city concept was a failed attempt to provide the Global South with significantly smoother democratization and development processes. Romer was intent on establishing a “Special Development Region” (SDR) that was ruled by the political and economic regulations of a developed country within the larger developing country of Honduras. The goal was to jump start economic growth within the SDR by establishing numerous industries, developing an urban center, providing housing to workers, and enforcing, through a transparency commission, the rules needed to keep the urban center headed in the right direction.

Perhaps most importantly, the SPD would provide a grid (Bueno de Mesquita & Smith Ch. 5) for its constituency, making it “as easy as possible” (Banerjee & Duflo “In Place of a Sweeping Conclusion”) for the population to live healthily and focus its energy on more than just survival. In addition, the large public safety net, along with banks, lending institutions, and government-subsidized insurance agencies that would have been established would have undoubtedly eliminated several of the poverty traps described throughout Poor Economics. The presence of these services

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would have provided local Hondurans with more access to the tools needed to engage in entrepreneurial activities and ultimately contribute to the growth of the entire SDR (Banerjee & Duflo Chs. 6, 7, 8).

All the while, the rest of Honduras (including the political elite) would continue business as usual. Romer argued that the Honduran people would “vote” for the new political and economic establishment in the event that they migrated to the SDR. Ideally, if enough people were to move to the SDR, the small coalition ruling Honduras would be incentivized to adopt the democratic system of governance exemplified in the SDR and the society as a whole would emerge more productive, egalitarian, developed, and democratic.

So why did the program fail? Because of the very political and economic rules that the SPD was trying to eliminate. In September of 2012, the Honduran government established an agreement with the first investor group set to invest within the SPD. The small coalition regime’s desire to stay in control and power, as elucidated in The Dictator’s Handbook (Bueno de Mesquita & Smith Ch. 3) prevented the SPD from being established as an independent entity, and shortly thereafter, the country’s supreme court scrapped the entire project.

Romer’s charter city concept makes the transition from an authoritarian to a democratic and a developing to a developed society easier following its initiation. However, the fundamental challenge pictured so elegantly in Bueno de Mequita and Smith’s graphic remains: how does one motivate the political elite participate in such a plan?

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