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Microfinance, foreign aid, Commitment to Development Index, debt and debt relief
David Roodman, a former CGD senior fellow, worked at the Center from March 2002 to July 2013. His work at the Center focused on microfinance, debt relief, and aid effectiveness. His widely praised book Due Diligence confronts questions about the impacts of microfinance and how it should be supported. He wrote the book through a pathbreaking Microfinance Open Book Blog, where he shared questions, discoveries, and draft chapters.
Roodman was an architect and manager of the Commitment to Development Index since the project's inception in 2002. The Index ranks the world's richest countries based on their dedication to policies that benefit the 5 billion people living in poorer nations; it is widely recognized as the most comprehensive measure of rich-country policies towards the developing world.
Roodman wrote several papers questioning the capacity of common cross-country statistical techniques to shed light on what causes economic development. He co-authored a 2004 American Economic Review paper that challenged findings of World Bank research that aid works in a good policy environment. His non-technical Guide for the Perplexed builds on analysis of methodological problems and fragility in other studies. Among econometricians Roodman is best known for his computer programs that run in the statistical software package Stata; articles about them won him the inaugural Stata Journal editors' prize in 2012. Also in 2012, Roodman aged off the RePEc list of top young economists in the world, at number 6.
Not to be melodramatic, but the official system for counting foreign aid is in crisis. The longstanding mathematical rule determining whether a loan’s interest rate is low enough to qualify it as aid has gone out of sync with the times. The rule’s benchmark interest rate of 10% per year was reasonable when adopted in 1972, but not now. Today, wealthy governments can borrow below 3%, lend a couple percent higher, come in well under the 10% bar, and count the potentially profitable lending as aid.
The econometric quest for evidence on aid effectiveness continues. Practitioners in the $80 billion-a-year aid enterprise care about their work and hanker for objective evidence that they are helping. In this working paper, CGD research fellow David Roodman argues that there is a clear aid-growth relationship, but instead of being positive and running causally from aid to growth, it is negative and runs from growth to aid--aid, that is, as it is usually measured: as a fraction of GDP. Roughly speaking (and not surprisingly!), when GDP goes up, aid/GDP goes down. Roodman argues that choices that economists commonly make in running the numbers often flip the apparent sign and direction of the aid-growth link, making it appear that aid is raising growth.
I can't recall feeling such an acute combination of fury and delight at a book before. Hugh Sinclair's Confessions of a Microfinance Heretic is a tell-all from an industry insider. It recounts his experience working in microfinance institutions (MFIs) in Mexico, Mozambique, Nigeria, and Mongolia, and then inside the microfinance investment firm Triple Jump. Near on half the book is about a single MFI, LAPO in Nigeria, which you might recognize from the New York Times article that Hugh engineered behind the scenes or from the masked blog commentator StreetCred, whose identity Hugh may know something about.
The extended scorchings of particular MFIs sometimes obscure what is, or is meant to be, the book's main message. It is not "these MFIs are bad so all microfinance is bad," for the text states more than once that the MFIs exposed may not be representative. It is rather that there is something wrong with the readiness of intermediaries to invest in the asserted bad guys---and here the list of institutions does represent a large swath of the industry: Triple Jump, BlueOrchard, Grameen Foundation, Calvert, Kiva, and more. To document his battles with them, Hugh has posted primary materials such as internal reports and phone call recordings. I assume he says less than he knows, his lawyers providing one filter for what can be public.
What delights in this book are the stories. I felt my heart beat as I read Hugh's account of the confrontation with his superiors at Triple Jump that would turn him into a whistleblower. Earlier, he tells how a man named Sam Grottis came to lead an MFI in Mozambique called FCC that Hugh would later be brought in to try to turn around:
He was apparently a former businessman and freedom fighter in Rhodesia who had experienced a Road to Damascus moment of enlightenment and had become a fundamentalist Christian---a prerequisite for senior managerial positions at World Relief. Eventually Grottis met a suitable westerner who displayed mutual agreement regarding the imminent end of the world and promptly made him CEO of FCC.
But you sense the sardonism: we can't quite trust the book to tell the full, fair story.
Then there's the water-selling lady in the hotel Hugh stayed at while working with LAPO in Nigeria:
Every morning I would buy a bottle of water for the day ahead, clearly labeled as N25.
The launch of the Global War on Terror (GWOT) soon after September 11, 2001 has been predicted to fundamentally alter U.S. foreign aid programs. In particular, there is a common expectation that development assistance will be used to support strategic allies in the GWOT, perhaps at the expense of anti-poverty programs. In this paper we assess changes in country allocation by USAID over 1998-2001 versus 2002-05. We find that any major changes in aid allocation related to the GWOT appear to be affecting only a handful of critical countries, namely, Iraq, Afghanistan, Jordan, and the Palestinian Territories. Concerns that there is a large and systematic diversion of U.S. foreign aid from fighting poverty to fighting the GWOT do not so far appear to have been realized.