Published on Africa Can End Poverty

Patrick v. Shanta, Round 2

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Patrick Bond’s lengthy comment on my response to his blog post merits a separate blog post.

Thanks for your response.  It appears as if there are at least four areas where we end up agreeing, except that I reach these conclusions using economic reasoning, which also serves to highlight some differences.

1. I’m glad you agree that there is a difference between accounting and economic welfare.  But you still don’t seem to accept the result of my simple example of two countries (one following a wasteful trajectory and the other the optimal one) that genuine savings is the same in both cases. 
The only way your desired result, that “genuine savings for Country 1 would be dramatically negative in the year under consideration” would be true is if the valuation of genuine savings were done at shadow prices, rather than at market prices, which is the way that Where is the Wealth of Nations does it. 

2. You also seem to agree that the real problem is with the way in which governments spend their resource revenues.  All the problems you cite, including those of Norway and Botswana, as well as those of the rest of Africa, can be traced back to poor public policies and institutions, many of which have worked against the poor. 

By the way, even your allusion to the Dutch disease is really a problem of the spending of resource revenues, not of resource extraction.  If you define Dutch disease as the appreciation of the real exchange rate following a resource boom (which is not necessarily a bad thing—but that’s a separate argument), then a country suffers from the disease only if it spends resource revenues on nontradables; if all the revenues were spent on tradable goods, there would be no real appreciation, and hence no Dutch disease.  In short, even the Dutch disease is a problem of spending of resource revenues.

If the problem is with the spending of resource revenues, then the solution is to improve the way in which governments use these revenues.  This is not easy to do, and goes back to the challenge of improving the policies and institutions that guide public action.  But this is the challenge we should all be working on.  I’m not sure it’s useful to say that, just because a government has not managed its resource revenues well, it should not extract more resources (especially when resource prices are high).  This does not help the poor.

3. You then list a string of concerns with the recent World Bank loan to South Africa to finance the production of electricity.  This operation, like most things in life, has benefits and costs. 

The benefits are the increased access to power for many people in the sub-region; the costs include some of the points you mention, such as carbon emissions and the financing costs.  Our analysis indicated that the benefits outweighed the costs.  We included estimates of the shadow price of carbon (based on international estimates) and of course the financing costs in that analysis.  If you accept the principle that decisions like these should be based on benefit-cost analysis, then I would encourage you to examine our analysis and its assumptions (all of which are in the public domain), rather than simply list a series of concerns.

4. Finally, I would wholeheartedly agree with you that there are problems with the domestic political consensus prevailing in many, if not all, poor countries (and some rich ones too).  I was using the phrase to distinguish between policies that were imposed from outside the country and those that emerged from a debate within the country.  While the latter is better than the former, there is no question that the political equilibrium that emerges in our countries leaves much to be desired.  That is why we see poor policies persisting.  It is also why we see politicians who advocate policies that are clearly anti-poor getting re-elected. 

There are huge political market failures in our countries, and the poor are the victims, just as they are of regular market failures.  Lest you think that this is an unusual statement from someone at the World Bank, I assure you that these ideas have permeated our thinking at least since the 2004 World Development Report, Making Services Work for Poor People.

But the existence of political market failures is precisely why we have to be careful in advocating solutions that look to government action, such as industrial policy, and in criticizing policies that take into account a country’s comparative advantage.  Many of the problems facing African countries today, including those of employment that you mention, stem from these government failures which were themselves the result of actions aimed at correcting market failures. 

As the history of industrial policy in Africa shows, these well-intentioned interventions backfired.  So in helping Africa industrialize—something we would all agree is necessary—we have to make sure we don’t fall into the same trap as before, namely, of ignoring the political market failures that may have been the cause of the problem in the first place.


Shanta Devarajan

Teaching Professor of the Practice Chair, International Development Concentration, Georgetown University

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