Kaufmann's blog

A few weeks ago Obama went to Ghana and delivered a major speech to Africa.  He spoke candidly about the dire governance challenges faced by many countries in the continent.  I also noted that Obama was not explicit about the implications of his message for rethinking donor aid strategies to the continent. Hopefully such revamp in donor aid will be part of the follow through of his speech, if there is follow through.

A month before his momentous trip to Accra to address the Ghanian Parliament, Obama had gone to Cairo to deliver a major address to the Arab world.  It is a speech, which is also worth studying in depth.  But it was more muted and unfocused, refraining from being too direct on the governance and freedom deficits in the Arab world. For one, Obama is not seen as a prodigal son there, in contrast with how he is regarded by Africa...

Today we are releasing the report Governance Matters VIII, which includes the new update of the Worldwide Governance Indicators (WGI).   Now collaborating from the Brookings Institution, I continue to take part in this research project with my former World Bank colleagues Aart Kraay and Massimo Mastruzzi.

Aid is dead:  it is worse than merely useless, since it abets and perpetuates mis-governance and dependency by Africa.  No, to the contrary, massive additional infusions of aid are crucial for all of Africa.  This massive transfer of aid to governments in Africa is particularly urgent right now, in the midst of the financial crisis, which is bound to inflict permanent damage everywhere in the continent.

These blanket statements are nonsense, on both sides.  While they may contain a 'straw man' element, unfortunately in slight variants one often sees such pronouncements in current writings and public debates.  In spite of the practical irrelevance of holding on to such extreme positions, such artificial debates go on and on, pitting the extremes against each other.  The media loves it.  Each side of the argument tends to fit selective 'facts' (and hyperbola) to their extreme cause.  Even reasonable analysts tend to write about one single determinant for the ills of Africa, or just opt to focus on one extreme side of the argument or the other.

President Obama has just written an op-ed for over a dozen newspapers throughout the Americas, in the eve of the Fifth Summit of the Americas that is about to take place in Trinidad & Tobago.

This is significant.  I care deeply about the Latin America and the rest of hemisphere, and wanted to write about the upcoming Summit.  Yet until now what we had was a draft Summit "Declaration" which the country leaders and their (Foreign Ministerial?) teams had been belaboring for a couple of years.

That draft "Declaration of Commitment of Port of Spain" is a travesty.  It is interminable and practically devoid of concreteness or substance.  It would be funny if we wouldn't be in the midst of a major economic crisis, one which is expected to hit South America particularly hard in the coming months.  Andres Oppenheimer has commented on that draft, labeling it as a joke.

Consider a very different “group-of-8” countries: Botswana, Chile, Mauritius, Uruguay, New Zealand, Norway, Singapore and Switzerland.  Do they have any relevance for the G-20?  Hardly, at first.  None of them are invited to the London G-20 Summit next week.  They are not G-20 members, since neither their economic size nor their population are large enough, and they lack the global “systemic significance” of most G-20 members.  None of them belongs to the EU.  This particular "group-of-8" in fact does not really exist as a formal body.

But there is a neglected rationale for the leaders of the G-20 to pay attention to this particular set of uninvited countries.  Like the G-20, they comprise a rather diverse group of developing and developed countries from different regions of the world.  But, unlike most of the G-20, this group of eight countries have exhibited high quality of national governance.

No country is perfect, obviously.  Each one in this group of 8 industrialized and emerging economies has its own challenges. But overall their quality of governance (and recent trends) exceed those of the Group-of-20, and to an extent even those of the powerful, formal, and elite Group-of-8.

This does matter.  Not just because failures of governance (among key nations in  the G-20) played a major role in today's financial crisis.  It also matters because lessons can be drawn for short and longer term initiatives from the good governance experiences from this group of 8 small countries (in short 'ggg-8' ifor this 'good governance group'-- and not in caps, since they are small, and not a formal group...).

‘Aid Effectiveness’ gone astray?  Imagine official multilateral and bilateral donor aid agencies holding high level meetings for years to agree on ‘harmonized’ aid strategies for recipient developing countries whose governments are expected to fully 'own' them.

Don't look in this space for formal definitions of donor aid ‘harmonization’.  They are in official reports from aid organizations; there you can also read about efforts to 'harmonize' the timetable and frequency of official visits by donors to recipient countries.

Instead, in this blog space let me spur debate, as I just did in a panel on ‘Aid Effectiveness’.  Let me start by echoing a panel member in advancing an unorthodox interpretation for donor ‘harmonization’:  lowest common denominator agreement among donors regarding their strategy towards a recipient country.  Spineless strategies, devoid of innovation, and skating over the toughest challenges for development.

There is no 'theory-independent' way of viewing reality.  We see and analyze world events through our own prism, shaped and tinted by upbringing, experiences, training and professional field of expertise. So it is not surprising that when it comes to the many explanations given for the current financial crisis, they differ greatly.

Another Ponzi scheme has allegedly been uncovered now, led by the Texas Financier R. A. Stanford, who may have swindled about 50,000 investors out of US $8 billion, or so.  The Feds have raided his house of cards but were having a hard time finding him. 

At US $50 billion, Madoff may have stood out because of the sheer magnitude of his scam.  But obviously he is not alone in large Ponzi schemes, not even within the US.  As global financial conditions have continued to deteriorate, the nakedness of those emperors without clothes is starkly exposed. 

But like the case of Madoff, this case also raises questions about whether ‘the SEC was asleep at the switch’ in this case as well.  Evidently allegations of fraud (and possible drug money laundering) have been made against Stanford over the past decade.  Yet the SEC took belated action very recently only after two former employees filed a lawsuit in civil court.

In my previous blog entry, I made the case that both the antecedents of the financial crisis faced by Chile in 1982, as well as the approach taken to resolve it, provide insights for countries such as the US today -suitably adapted by circumstances, size and complexity, of course.  Nonetheless, focusing on the fundamental pillars to approach the crisis comprehensively (including fiscal and monetary policies, institutional revamp, financial workouts, regulatory reforms) always ought to be a priority, rather than endless debates about whether one initiative such as a ‘bad bank’, will be the solution.  

From its more recent experience, there are further insights from Chile for the Americas. One is Chile’s consistently effective macro-economic management over the past two decades, where fiscal surpluses (a term that appears to have been excised from the US lexicon) have been the order of the day.  In fact, ‘best practice’ stabilization funds have permitted a sizeable accumulation of public funds during the ‘fat cow’ years, for judicious use during leaner times. 

Forbes Magazine invited me to write an article on corruption.  Among others, I argue that the US financial crisis is a major and overdue wake-up call to the dormant anticorruption field, which for too long has focused on conventional second-order issues (here the article).   I also suggest that some humility could help: for a change, lessons from an emerging economy could be useful to the current situation in the US.  We know that the experience of Sweden in addressing their past financial crisis  offers some insights. 

But it is also important to draw on the lessons from other countries.  Let us focus on Chile, another country in the Americas (the era of equating the US with America should be over anyway).  I am getting questions about the parallels and insights from Chile for the US crisis.  Let me bring up a few points here, with some more detail than in Forbes.