Tag Archives: foreign aid

(Revised) Should We Print Money For Aid?

I recently sat down to watch an interesting TED talk by Michael Metcalfe, a senior managing director at State Street Global Markets, who brought up a few interesting ideas about the way we fund our foreign aid programs. Metcalfe begins the talk by introducing a few interesting observations about the global economy. He first addressing the contradiction in foreign aid policy in developed countries. Metcalfe points out that, although the United Nations has put forth the incredibly ambitious Millennium Development Goals, which include halving extreme poverty rates and halting the spread of HIV/AIDS by 2015, the ratio of foreign aid to national GDP of developed countries has stagnated around 0.35%, even though aid targets remain at 0.7% of GDP. He asserts that foreign aid payments have also dropped since the financial crisis, and that progress towards our ambitious development goals will remain slow if this problem is not properly addressed. His solution? Simply print money for foreign aid.

At the basis of Metcalfe’s idea is the suggestion that the money supply doesn’t affect inflation as drastically as many believe. He explains that despite the U.S. Federal Reserve’s multi-trilion dollar asset purchasing program, the inflation rate in the U.S. has remained relatively unaffected 6 years later. Indeed, if we use the Consumer Price Index as a strong proxy for annual inflation in the U.S., then it does appear that the price level, apart from a small and temporary increase during the recession, hasn’t dramatically risen since the financial crisis. Screen Shot 2014-04-05 at 9.19.05 PMBuilding the foundation of his argument upon this information, Metcalfe asserts that we should take a fraction of the money that was printed to stimulate the economy and send it to countries who rely on U.S. foreign aid. Like a firm that matches the charitable donations of its employees, the U.S. central government could encourage the Federal Reserve to match its contributions to its annual foreign aid payments. Furthermore, since these payments would be going overseas, he explains that it’s not obvious how this form of funding would directly contribute to inflation in the central bank’s home country. According to Metcalfe, this could dramatically increase the amount of foreign aid payments to developing countries with limited risk to creating inflation and smaller requirements from the central government’s coffers.

At first glance this looks like a very interesting idea, and one that seems certain to garner praise. I mean, who wouldn’t want to eliminate eliminate global poverty with a few keystrokes from the FED? On the other hand, there do appear to be a few inconsistencies with his logic and methods that could prove problematic. First, I would be careful not to make the assumption that just because inflation didn’t appear to increase much after QE, that printing money doesn’t cause high levels of inflation. While it is true that the central banks of the U.S., UK, and Japan created around $3.7 trillion to help push the global economy out of a recession, that doesn’t mean that all of this money made it out into the economy. As we’ve all learned in Econ 102, the Federal Reserve adjusts the money supply though Open Market Operations, in which it buys securities from national banks. These banks are then supposed to take this newfound money and loan it out to individuals, whereupon it the money will have a multiplicative effect after individuals deposit their loans in other banks, who lend out a share of this money to other individuals, who deposit it in other banks, so on and so forth. A problem occurs, however, when banks decide not to lend money to individuals. This was an apparent phenomenon during the financial crisis when banks decided to hold on to the Fed’s newly invented money in in fears of the risk of financial collapse. We actually see there is a steep decline in the number of loans make by commercial banks after the financial crisis, so not all the money created by the fed actually entered the U.S. economy. Therefore, it’s not fair to use the Fed’s dramatic monetary policy and subsequent small blip in price levels during the recession as evidence that we could simply print money for aid without affecting inflation. Screen Shot 2014-04-05 at 10.25.44 PM

 

It seems surprising that a senior managing director and supposed global macroeconomic expert would make such a statement based on shaky evidence, so perhaps he is more privy to the more quantitative effects of QE on inflation than he lets on in his talk (he only has 15 minutes after all). Regardless, I would also contend that his strategy may also fail on practical terms as well.

Let’s assume that hypothetically the Fed liked this idea and wanted to enact this as part of its monetary policy. In order to legally make the donation, the Fed would likely have to enact open market operations in foreign countries by buying up bonds from central banks (or, if absent, the central government) in developing countries. While the Fed might expect that the banks would lend this money out to the citizens, thus stimulating the local economy, this may backfire given higher levels of corruption in these developing countries (corrupt and ineffective governments are often important reasons why many countries remain in the “third world”). Many of the most impoverished countries do in fact score highest on indices of political corruption, such as Sudan and Haiti. These banks and governments may decide to shower the money upon themselves, leaving the citizens still impoverished. Furthermore, government debt in third world countries is likely to be far riskier than in developed countries, and the bonds are more likely to loves their value and perhaps even become worthless. In these cases the Fed might be accused of the wasteful funneling of money to corrupt dictators and enterprises. Therefore, it would be unlikely that the Fed could effectively channel foreign aid to developing countries and ensure that the funds would reach the citizens and companies that need them most.

Overall, these are only a few of the many problems the Fed would face if it actually decided to consider this type of policy. It appears that there may be some large problems in Mr. Metcalfe’s solution to the foreign aid gap that would have to addressed before this could become feasible government policy.

 

Should We Print Money For Aid?

I recently sat down to watch an interesting TED talk by Michael Metcalfe, a senior managing director at State Street Global Markets, who brought up a few interesting ideas about the way we fund our foreign aid programs. Metcalfe begins the talk by introducing a few interesting observations about the global economy. He first addressing the contradiction in foreign aid policy in developed countries. Metcalfe points out that, although the United Nations has put forth the incredibly ambitious Millennium Development Goals, which include halving extreme poverty rates and halting the spread of HIV/AIDS by 2015, the ratio of foreign aid to national GDP of developed countries has stagnated around 0.35%, even though aid targets remain at 0.7% of GDP. He asserts that foreign aid payments have also dropped since the financial crisis, and that progress towards our ambitious development goals will remain slow if this problem is not properly addressed. His solution? Simply print money for foreign aid.

At the basis of Metcalfe’s idea is the suggestion that the money supply doesn’t affect inflation as drastically as many believe. He explains that despite the U.S. Federal Reserve’s multi-trilion dollar asset purchasing program, the inflation rate in the U.S. has remained relatively unaffected 6 years later. Indeed, if we use the Consumer Price Index as a strong proxy for annual inflation in the U.S., then it does appear that the price level, apart from a small and temporary increase during the recession, hasn’t dramatically risen since the financial crisis. Screen Shot 2014-04-05 at 9.19.05 PMBuilding the foundation of his argument upon this information, Metcalfe asserts that we should take a fraction of the money that was printed to stimulate the economy and send it to countries who rely on foreign aid. Like a firm that matches the charitable donations of its employees, the U.S. central government could encourage the Federal Reserve to match its contributions to its annual foreign aid payments. Furthermore, since these payments would be going overseas, he explains that it’s not obvious how this form of funding would directly contribute to inflation in the central bank’s home country. According to Metcalfe, this could dramatically increase the amount of foreign aid payments to developing countries with limited risk to creating inflation and smaller requirements from the central government’s coffers.

At first glance this looks like a very interesting idea, and one that seems certain to garner praise. I mean, who wouldn’t want to eliminate eliminate global poverty with a few keystrokes from the FED? On the other hand, there do appear to be a few inconsistencies with his logic and methods that could prove problematic. First, I would be careful not to make the assumption that just because inflation didn’t appear to increase much after QE, that printing money doesn’t cause high levels of inflation. While it is true that the central banks of the U.S., UK, and Japan created around $3.7 trillion to help push the global economy out of a recession, that doesn’t mean that all of this money made it out into the economy. As we’ve all learned in Econ 102, the Federal Reserve adjusts the money supply though Open Market Operations, in which it buys securities from national banks. These banks are then supposed to take this newfound money and loan it out to individuals, whereupon it the money will have a multiplicative effect after individuals deposit their loans in other banks, who lend out a share of this money to other individuals, who deposit it in other banks, so on and so forth. A problem occurs, however, when banks decide not to lend money to individuals. This was an apparent phenomenon during the financial crisis when banks decided to hold on to the Fed’s newly invented money in in fears of the risk of financial collapse. We actually see there is a steep decline in the number of loans make by commercial banks after the financial crisis, so not all the money created by the fed actually entered the U.S. economy. Therefore, it’s not fair to use the Fed’s dramatic monetary policy and subsequent small blip in price levels during the recession as evidence that we could simply print money for aid without affecting inflationScreen Shot 2014-04-05 at 10.25.44 PM

 

It seems surprising that a senior managing director and supposed global macroeconomic expert would make such a statement based on shaky evidence, so perhaps he is more privy to the more quantitative effects of QE on inflation than he lets on in his talk (he only has 15 minutes after all). Regardless, I would also contend that his strategy may also fail on practical terms as well.

Let’s assume that hypothetically the Fed liked this idea and wanted to enact this as part of its monetary policy. In order to make the donation, the Fed would have to enact open market operations in foreign countries by buying up bonds from central banks (or, if absent, the central government) in developing countries. While the Fed might expect that the banks would lend this money out to the citizens, thus stimulating the local economy, this may backfire given higher levels of corruption in these developing countries (corrupt and ineffective governments are often the reason why many countries remain in the “third world”). Many of the most impoverished countries do also score highest on indices of political corruption, such as Sudan and Haiti. These banks and governments may in some cases decide to shower the money upon themselves, leaving the citizens still impoverished. Furthermore, government debt in third world countries is likely to be far riskier than in developed countries, and the bonds are likely to become worthless. Therefore, it would be unlikely that the Fed could effectively channel foreign aid to developing countries and find the money reaching those that need it most.

Overall, it appears that there may be some large problems in Mr. Metcalfe’s solution to the foreign aid gap that would have to addressed before this could become feasible government policy. 

 

(Revised) World Poverty- Better Than We Think

It is very common for us to hear, and say, that the world’s most pressing issues are war, disease, poverty, etc. Indeed, these are problems humanity faces today, and has been facing for all of history. Complex, far-reaching complications like these deserve our attention always. But the focus of this post is on poverty, in which we have made colossal improvements, despite popular belief.

The kind of poverty with which we are concerned is absolute poverty, not relative (which measures well-being compared to others in the same area). The World Bank defines poverty as “pronounced deprivation in well-being. The conventional view links well-being
primarily to command over commodities, so the poor are those who do not
have enough income or consumption to put them above some adequate minimum
threshold.” That threshold has been defined as $1.25 per day (although $1.50 or $2.00 per day are at times used instead).

First, people tend to focus on the negative statistics of poverty. Of course the fact that in 2010 21% of households in developing countries lived below the extreme poverty line ($1.25 per person daily), deserves our attention and is not to be understated. But the usually-overlooked side of the statistic reveals that just 30 years earlier (in 1980) the figure was at 52%. That is quite an astonishing improvement in such a short period of time. An article from the New York Times has a very optimistic take on this issue. It quotes that “In April, the Development Committee of the World Bank set the goal of ending extreme poverty by the year 2030. More recently, the United Nations General Assembly working group on global goals concluded that “eradicating poverty in a generation is an ambitious but feasible goal.””

Many popular myths about poverty often undermine the potential to eradicate it. An article from the WSJ explains the three main ones: that poor countries are doomed to stay poor, foreign aid is a waste, and saving lives leads to overpopulation. To say that poor countries are doomed to stay poor is to have a very ignorant take on history. Many of the world’s richest, and fastest-growing countries today were once very poor (such as South Korea, China, Thailand, Brazil, Peru, Mexico, and India). This is not to say that poverty traps are not real, they very much are. But it is quite possible to overcome them. The article predicts that “by 2035, there will be almost no poor countries left in the world.” This is a very ambitious prediction, of which I too am skeptical, but experts seem to agree with the general positive trend of eradicating poverty in the 21st century.

Also, as the article outlines, foreign aid is a significant factor in getting countries out of poverty traps. The issue of corruption is evident, but it is not significant enough to stop helping these countries altogether. The article states “we’ve heard plenty of people calling to shut down aid programs if one dollar of corruption is found. But four of the past seven governors of Illinois went to prison for corruption, and no one is demanding that Illinois’s schools be shut down or its highways closed.” It is also not the case that countries become dependent on aid- Brazil, Mexico, Chile, Costa Rica, Peru, Thailand, Mauritius, Botswana, Morocco, Singapore and Malaysia have grown so much that they barely receive aid today. This being said, there is much debate about whether aid is actually helpful. Kenneth Rogoff summarizes the argument against foreign aid, stating that it is often misdirected, misused, it puts a strain on local resources, and that most of today’s biggest economies grew without the help of aid. (Thanks mhupp for the link to this). Unfortunately, it is difficult to know the effects of aid with certainty. However, it is true that under-developed countries today are trying to emerge into existing global markets, whereas growing countries in the past basically created the global markets.

Lastly, the idea that saving people will lead to overpopulation is, in my opinion, the most ridiculous one. Not only is it inhumane, but it is entirely wrong. As countries develop, their death rates fall and birth rates fall soon after. The general trend indicates that development leads to a sharp decrease in population growth. Many of the world’s richest countries today are in fact headed in a negative population-growth direction (like Germany). It is simply not true that feeding poor people will just produce more poor people. Education, medicine, and contraception are the key to reducing birth rates, for which aid is often necessary.

In sum, the eradication of poverty is much more feasible than we tend to think. The myths we often use to disprove the idea of eradication, are found to be completely wrong. Looking at the vast improvement in poverty over the past 50 years is not reason to sit back and feel accomplished, it is reason to work harder to eradicate it because the end is in sight. Of course, there will always be “poor” people compared to others (i.e. inequality)- which is a separate issue. But the poor we are concerned with (for now) are ones who cannot eat enough to work, and live. Putting an end to this kind of poverty will propel countries into development, and make everyone in the world better off.

How to help poor countries tackle poverty?

As millions of people honored Martin Luther King across the nation on Monday, an issue with global impact remains debatable – how should rich countries, like the United States, help poor countries tackle poverty and other human rights concerns?

According to Bill & Melinda Gates Foundation,

The global picture of poverty has been completely redrawn. Per-person incomes in Turkey and Chile are where the U.S. was in 1960. Malaysia is nearly there. So is Gabon. Since 1960, China’s real income per person has gone up eightfold. India’s has quadrupled, Brazil’s has almost quintupled, and tiny Botswana, with shrewd management of its mineral resources, has seen a 30-fold increase. A new class of middle-income nations that barely existed 50 years ago now includes more than half the world’s population.

And yes, this holds true even in Africa. Income per person in Africa has climbed by two-thirds since 1998—from just over $1,300 then to nearly $2,200 today. Seven of the 10 fastest-growing economies of the past half-decade are in Africa.

In the long run, World Bank aims to cut down on those that live in “extreme poverty” to 3% worldwide by 2030.

Undoubtedly, foreign aid has been playing a critical role here.

However, many people show concerns about such generosity – in particular, will it account for a large share of our budget? Will it turn out to be ineffective due to corruption in poor countries?

Actually, the first concern is unnecessary since foreign aid is less than 1% of national income in the United States, where spending on farm subsidies and the military are more than twice and 60 times compared to that on international health aid. On a global level, Norway, the most generous nation in the world, spends less than 3% of its national income on foreign aid. Therefore, such offering would not be a real burden for people living in the rich.

The second one is somewhat more reasonable. Corruption has been one of the most prevailing problems in poor nations and there is a chance that foreign aid could be wasted. Nevertheless, this should not be an excuse of pull-back because corruption is just like a 2% tax on foreign aid given its relative small scale. Certainly, we should try to reduce such negative, but the fact that we cannot eliminate it should not prevent us from saving lives in those developing or undeveloped parts of the world.

So from my perspective, foreign aid should be offered continuously especially in the health and infrastructure sectors so as to enhance human welfare in the poor. Furthermore, education should be on focus as well as part of the effort to advance development of civilian rights in the long run.

http://online.wsj.com/news/articles/SB10001424052702304149404579324530112590864?mod=trending_now_1

http://www.worldbank.org/en/news/press-release/2013/10/07/africa-continues-grow-strongly-poverty-inequality-persistently-high

World Poverty- Better Than We Think

It is very common for us to hear, and say, that the world’s most pressing issues are war, disease, poverty, etc. Indeed, these are problems humanity faces today, and has been facing for all of history. Complex, far-reaching complications like these deserve our attention always. Wars are still happening, enemies still bomb each other, and allies fight each others’ wars. However, humanity has made immense improvements in medicine, to fight disease, and death rates have sharply decreased over the past century. But the focus of this post is on poverty, in which we have made colossal improvements, despite popular belief.

People tend to focus on the negative statistics of poverty. Of course the fact that in 2010 21% of households in developing countries lived below the extreme poverty line ($1.25 per person daily), deserves our attention and is not to be understated. But the usually-overlooked side of the statistic reveals that just 30 years earlier (in 1980) the figure was at 52%. That is quite an astonishing improvement in such a short period of time. An article from the New York Times (The End of Poverty, Soon) has a very optimistic take on this issue. It quotes that “In April, the Development Committee of the World Bank set the goal of ending extreme poverty by the year 2030. More recently, the United Nations General Assembly working group on global goals concluded that “eradicating poverty in a generation is an ambitious but feasible goal.””

Many popular myths about poverty often undermine the potential to eradicate it. An article in the Wall Street Journal (Three Myths on the World’s Poor) explains the three main ones: that poor countries are doomed to stay poor, foreign aid is a waste, and saving lives leads to overpopulation. To say that poor countries are doomed to stay poor is to have a very ignorant take on history. Many of the world’s richest, and fastest-growing countries today were once very poor (such as South Korea, China, Thailand, Brazil, Peru, Mexico, and India). This is not to say that poverty traps are not real, they very much are. But it is quite possible to overcome them. The WSJ article predicts that “by 2035, there will be almost no poor countries left in the world.” This is a very ambitious prediction, of which I too am skeptical, but experts seem to agree with the general positive trend of eradicating poverty in the 21st century.

Also, as the article outlines, foreign aid is a significant factor in getting countries out of poverty traps. The issue of corruption is evident, but it is not significant enough to stop helping these countries altogether. The article states “we’ve heard plenty of people calling to shut down aid programs if one dollar of corruption is found. But four of the past seven governors of Illinois went to prison for corruption, and no one is demanding that Illinois’s schools be shut down or its highways closed.” It is also not the case that countries become dependent on aid- Brazil, Mexico, Chile, Costa Rica, Peru, Thailand, Mauritius, Botswana, Morocco, Singapore and Malaysia have grown so much that they barely receive aid today.

Lastly, the idea that saving people will lead to overpopulation is, in my opinion, the most ridiculous one. Not only is it inhumane, but it is entirely wrong. As countries develop, their death rates fall and birth rates fall soon after. The general trend indicates that development leads to a sharp decrease in population growth. Many of the world’s richest countries today are in fact headed in a negative population-growth direction (like Germany). It is simply not true that feeding poor people will just produce more poor people. Education, medicine, and contraception are the key to reducing birth rates, for which aid is often necessary.

In sum, the eradication of poverty is much more feasible than we tend to think. The myths we often use to disprove the idea of eradication, are found to be completely wrong. Looking at the vast improvement in poverty over the past 50 years is not reason to sit back and feel accomplished, it is reason to work harder to eradicate it because the end is in sight. It is important to note, though, that we are referring to the international (absolute) poverty line and not the relative poor. Of course, there will always be “poor” people compared to others. But the poor we are concerned with (for now) are ones who cannot eat enough to work, and live. Putting an end to this kind of poverty will propel countries into development, and make everyone in the world better off.