Asymmetrical Information

From the desk of Mindles H. Dreck:

I'll have an international do-gooder bureaucracy with a side of humility.

Whenever we attempt to tame complex systems and events with contrived man-made solutions, our early attempts usually disappoint. The brilliance of the free marketplace is that we either adapt our solutions or fail ("creative destruction", as Schumpeter first said). Those individual failures can be painful. The problem with public and quasi-public agencies is these initial failures are perpetuated, sometimes endlessly, and sometimes with tragic results that go far beyond individual marketplace failures. There is so much evidence around us of bureaucracies that fail to learn from their own mistakes. It seems to be the occupational failing of such organizations to confuse intentions with results and/or accuracy.

I thought about this reading this article by Edward Luttwak (linked by Instapundit) pointing out the tendency of relief agencies to become the tool of the local warlord or corrupt regime:

That is what aid organisations do: to follow the television cameras inside conflicted countries, to obtain the publicity that keeps contribution flowing and the aid organisations in business, they pay off local warlords and mere gang leaders in transactions thinly masked as "escort fees", while feeding their warriors.

When unarmed aid operatives are handing out food and other help, men in arms are bound to be the first claimants on anything going. Aid organisations, in the odour of sanctity, thus serve as the quartermasters of civil war, as they did in Somalia most notoriously.

Pungent phrase, that, "the odour of sanctity". Kind of like the U.N. Relief agencies and global socialism proponents that were shrill critics of both the food packages and the bombing.

Luttwak's comments remind me of the ideas presented in gory detail in books I have read recently. Bjorn Lomborg points out in The Skeptical Environmentalist that the shoreline clean-up after the Exxon Valdez appears to have done more damage than good:

Pressure-washing the coast, however, killed much of the marine life. By way of experiment, some stretches of beach were left uncleaned, and it transpired that life there returned after just 18 months, whereas it did not do so to the cleaned beaches for three to four years (footnote). The oil experts had siad this would be the case time and time again during the first few months of the cleanup - but in vain, as this did not harmonize with the public view of things, i.e. that c acleanup had to be better for the animals. As Scientific American wrote, "the public wants the animals saved - at $80,000 per otter and $10,000 per eagle - even if the stress of their salvation kills them." (footnote)

As Lomborg points out in many other chapters, most notably the one on Global Warming, it goes beyond "the public wants" to "the model says". Bureaucies construct enormously complicated models to predict the behaviour of yet more complicated systems, and then believe that their intentions make their models correct. Therefore, spending billions and billions of dollars that might otherwise have been invested in creating mundane jobs is worthwhile for greenhouse gas reduction. Yet it is clear, according to Lomborg, that global warming models may not be accurate enough to justify the enormous investments demanded by the most shrill advocates. Then he goes on, at length, to show that even taking the most credible models at face value, the cost of the Kyoto protocol may still not be justified against the impact on global GDP.

William Easterly spends the entirety of The Elusive Quest for Growth (there's that misplaced modifier again) showing how the World Bank and IMF have granted enormous amounts of loans and aid to various countries with no significant growth explained by their own policies. The basic model used by the World Bank for most of the postwar period is one of "capital fundamentalism" which suggests that the proper mix of labor and capital inputs can be divined (by the World Bank of course) and plugged with aid:

Many times over the past fifty years, we economists thought we had found the right answer to economic growth. It started with foreign aid to fill the gap between "necessary" investment and saving. Even after some of us abandoned the rigiditiy of the "necessary" investment idea, we still thought investment in machines was the key to growth. Supplementing this idea was the notion that education was a form of accumulating "human machinery" that would bring growth. Next, concerned about how "excess" population might overwhelm the productive capacity of the economy, we promoted population control. Then, when we realized that government policies hindered growth, we promoted official loans to induce countries to do policy reforms. Finally , when countries had trouble repaying the loans they incurred to do policy reforms, we offered debt forgiveness....

The facts contradict the capital fundamentalists....If transitional capital accumulation were the main source of growth differences, then countries should have very high rates of return to capital at the beginning. They do not. If transitional capital accumulation were the main source of growth differences, we would expect the poor, capital-scarce countries to grow faster than the rich as they respond to these high returns to capital. They do not. If transitional capital accumulation were the main source of growth differences we would expect capital accumulation to explain a lot of the cross-country differences in growth. It does not. Trying to grow by capital alone was another useless panacea.

These expenditures as well are dictated by models built by bureaucrats, who then slavishly stick to them even as they are proven wrong. NGOs fall into a similar trap from the relief agencies criticized by Edward Luttwak above. They become part of the problem, supporting corrupt thugocracies instead of promoting the welfare of the citizenry. Easterly points out, similarly to Luttwak, that Petty dictators need hordes of starving people to show to the international financial organizations in order to justify...more loans and aid. The fungibility of money allows the government to put the money to other illegitimate uses.

The theme of Easterly's book is "people respond to incentives" - people do what they are paid to do. If you become proportionately more famous by suggesting a global calamity with a high degree of certainty, do it. If dispensing ever larger dollar amounts of aid and plastering your annual report with pictures of starving children put on parade by third world despots just for you allows your agency to grow - do it. If you are judged by the amount of food delivered across a border, deliver it regardless of how you are used in the process. If your benchmark is the amount of people you feed, as opposed to the amount of total hunger where you are operating, then the general level of welfare is immaterial. If your museum gets more government funding based on the number of visitors, bait Rudolph Giuliani into some free publicity by featuring a poop-smeared Madonna.

Bureaucratic elites pursuing altruistic goals have a mixed track record, simply because they often end up pursuing their own interests. Ironically, we have found that some of the most effective institutions and traditions of the world, such as the markets and democratic government, are sustained by many actors independently pursuing their own self-interest with little "odour of sanctity". This is because when you pursue your own self interest, you check to see if its working every now and then. Then, displaying your human ingenuity, you adapt until you either a) your interests are at last advanced or b) you fail beyond recovery.

I argue not that these agencies should be abolished, but that we radically change the way they are judged and funded. In my professional community (investment managers) there is ample evidence of our failures to model and anticipate complex markets. We receive a dose of humility almost daily. And our customers stand ready to deliver a report card on our results. The markets themselves almost always work. Adam Smith called it the "Invisible Hand". I think George H.W. Bush was trying to apply that idea of accountability to a market of actors to the non-profit world when he debuted his much-ridiculed "thousand points of light" idea. He was right, a little more market-like results-based humility would serve the world of government and NGO bureaucracies well.

To come back to the warblogging theme, let the NGOs always ask themselves, how many, in total, could feed themselves or be fed before? How many, in total, can feed themselves or be fed now? And in each case, at what expense to their freedom and personal safety did they obtain this food? Surely, now that women are allowed to work, more can feed themselves. And what sort of threat is posed by the regime implicitly supported by such aid? Can aid be distributed more effectively by the U.S. military which can airdrop into remote areas and provide its own protection? If freedom spawns growth and growth feeds more mouths, shouldn't we work towards greater freedom?

Well, perhaps that last one is too much to ask...

Posted by Mindles H. Dreck at November 26, 2001 09:38 PM | Technorati inbound links