I’m trying not to over-react to Tim Worstall’s naiive article over at Tech Central.

His core premise is right.  Supply side reforms are essential for economic growth and prosperity, in developing countries as well as in wealthy countries.  Measures to promote improvements in the supply performance of an economy will increase the welfare of its inhabitants and should be encouraged.

But on this sensible proposition, Tim jumps to a set of conclusions which have no basis in reality.

Tim’s conclusions, in a nutshell, are that countries should sort out the "infrastructure of the economy rather than simply pumping money in"; that donors should withhold aid from countries that do not liberalise telecomms; that Africans invest abroad and that the continent would not be short of money if the investment climate were better; that the only donor to understand this is the US; and that Africa needs "less Live 8". (Apologies if this abridged version does not do justice to the orginal – you can read the full article here to see if I have missed anything.)

So what is wrong with these conclusions?

First, donors have been working hard for decades on helping countries to improve the supply side and promote investment.  For example, the UK Government’s White Paper on International Development in 2000 set out a detailed set of measures, which were summarised as commitments to:

• Help developing countries build the effective government systems needed to reform their economic management, make markets work for poor people, and meet the challenge of globalisation.
• Work to reduce corruption, and ensure respect for human rights and a greater voice for poor people. […]
• Work with developing countries to put in place policies that will attract private financial flows and minimise the risk of capital flight.
• Work to strengthen the global financial system to manage the risks associated with the scale, speed and volatility of global financial flows, including through use of ‘road maps’ to guide countries on opening of their capital accounts.

In fact, every UK Government White Paper on International Development since the Treasury White Paper of 1960 has highlighed the central importance of improving the supply side.  The central importance of improving the supply side has been recognised by all aid agencies, and pretty much everybody working on development, for the last half a century.

Second, there is no single magic measure to improve the supply side.  Over the fifty years since decolonisation, there have been a range of fashionable ideas about how best to improve the supply performance of the economy. At various points, commentators have stressed the absolute priority of  investing in physical infrastructure, institution building, improving skills, raising productivity through improved health, economic liberalisation, commercialisation of public enterprises, support for financial markets and microfinance, support for small and medium sized enterprises, trade openness, and  macroeconomic stability.  The hard truth is that all of these are important components of improving economic performance and that any one of them, on its own, is not enough.  (The need for an interrelated set of improvements was a central theme of a book by my colleague Bill Easterly).

Third, supply side improvements are not typically cheap in the short run.  Virtually all the measures listed above require considerable investment in the short term. (The economic benefits exceed the cost, but the benefits come after the costs have been borne.)   Investment in physical and human capital are obviously expensive.  Institutional reforms require transitional costs (for example, to make redundancy payments, to invest in IT or retrain a workforce).  And as we know in developed economies, it is politically impossible to liberalise markets without finding some way to compensate those who lose the most from the change.  We have the utmost difficulty liberalising markets in very rich economies, in which we have the money to compensate the losers (think of airlines and broadband in the US, or farming in Europe); it is an order of magnitude harder if you are the finance minister in a country with no discretionary funds.  (Tim gives a particular example of telecomms liberalisation, which he seems to think is straightforward.  In fact, state owned telecomms companies provide a substantial share of domestic revenues in many developing countries, and are often an important source of foreign currency earnings. As a result, liberalising telecomms, which would clearly be economically desirable, is financially unfeasible for many developing countries.)

Fourth, making aid conditional on supply side improvements does not accelerate reform.  Much as we might want to believe that our views on how countries should be governed can be imposed by withholding aid from countries that do not make progress, there is absolutely no evidence that aid conditionality is an effective way of accelerating reform.  (See Tony Killick’s research for a full discussion of this, including a full discussion of the literature on conditionality.)  The leaders of developing countries for the most part understand full well the importance of supply side improvements in the economy; they lack the resources and the institutional and political infrastructure to deliver them.  Wagging our fingers at them and threatening to cut off the resources they need does not help them to make progress; understanding the challenges they face and helping them to navigate through them does.

Fifth, just because the supply side matters does not mean that other interventions are not important.  While improving the supply performance of the economy is vitally important, so is vaccinating children, promoting access to justice, tackling conflict, fighting corruption, educating the next generation, alleviating the immediate problems of poverty and hunger, reforming political institutions, investing in science and technologies that benefit people in poor countries, and the host of other things that contribute to international development, on which development assistance is spent. There is no basis in logic, and no evidence, to support the conclusion that because supply side improvements are important, that African countries would benefit from receiving less assistance in other ways. 

Sixth, Live 8 is a way of achieving higher levels of investment and economic growth, not an alternative to it. Tim’s heading ("Less Live 8, More Self Help") suggests that there is a trade-off between the goals of Live 8 and supply side improvements to promote investment and growth.  The goals of Live 8 are more and better aid, broader debt relief and more trade access: and these are all complements to the supply side improvements that are needed.  As the Africa Commission Report explained,  increasing resources available for infrastructure investment, education and health, economic reforms, technological progress, tackling conflict and promoting priv
ate sector growth, is an essential component of creating a virtuous circle of investment, employment and rising prosperity.  The Live 8 agenda of more resources and greater market opportunities are an essential contribution to the supply improvements that are needed.

Conclusion

From an uncontroversial premise that the supply side is important, Tim Worstall has built a set of conclusions and policy prescriptions that have no basis in the real world.  The donors and developing countries well understand the importance of improving the supply side. Not only is there no trade-off between this and providing more resources, the resources are used to fund the very reforms and investments that Tim would advocate.  The objectives of Live 8 are not an alternative to reform, they make a vital contribution to accelerating it. Withholding aid from countries that do not achieve the reforms does not help, and may well lead to slower progress. 

There are many people who spend much of their time working to help governments in developing countries to improve their economic performance; and they have good understanding of the importance of improving the supply side. There is a wealth of experience, evidence and analysis, and we are continuing to learn.  It is downright insulting to be lectured by Tim Worstall on the basis of nothing more than his homespun economics and first principles.  And we owe it to hundreds of millions of people who are, quite literally, dying from poverty, to base our policies and approach on evidence and experience.