Athens’ comparative advantage was its location: its ports, once fortified, created great distance from its enemies; its silver reserves, once mined, brought wealth that could pay for a navy of rare size and excellence. This latent potential might have stayed dormant had it not been for the threat of foreign invasion from Persia. Competition threatened the existing Athenian elites, and increased their interest in a navy, which was then enough to overtake the interest groups threatened by the navy, namely the horsemen. It so happened that the naval unit most advantageous to Athens would be the trireme. The trireme’s effectiveness was dependent on the participation and skill of many Athenians outside the current power structure. Thereby the the elite power structure of Athens changed with the rise of the navy, empowering some of the lower classes and creating new opportunities for elites to accumulate power, most directly through perceived excellence in military command.

Athens’ naval power had second-order effects on the city-state as well. Domination of the sea allowed for greater commercial and cultural exchange that enriched a new group of commercial elites who had a vested interest in peace and mare liberum. The wealth and openness to foreigners that accompanied this change coupled with the value placed on technical excellence in rhetoric and the arts also heightened the demand for intellectuals. The increased demand for intellectual and artistic excellence resulted in the rise of philosophy, drama, history, art and architecture to heights previously not seen in Athens.

Athens’ naval power also changed its relationship to the outside world. It’s comparative advantage allowed the city-state to create value for other Greek societies by policing the waters, allowing for freer trade and reducing the threat of foreign invasion. When the threat of foreign invasion was high, allies saw it in their interest to pay for this service. The incentive to free-ride, however, increased over time. The Athenian navy now existed as an organization with interests in its own survival — such free-riding was unacceptable — and Athens exercised its power to coerce payment for its service at the highest rates they could safely (for the time) extort.

Like its rivals, Athens’ ability to compete militarily was limited by its political system. As Sparta was hamstrung by the threat of slave riots in the homeland, Athens was encumbered by its particular system of checks-and-balances. Beginning with Themistocles, the father of the Athenian navy, the elites and their democratic coalitions ostracized many of the city-state’s greatest leaders. The democratic body was divided between minority commercial aristocrats who saw greater returns in peace, and the majority elites and masses whose vision of militaristic primacy was tied to their own personal interest in the navy. Because of Athens’ political structure, this competition manifested in the systematic dismissal of excellent leaders and the promotion of fiery, war-mongering populists. The commercial elites were largely politically silenced, with their voices reflected in the plays put on by Attic’s greatest playwrights in the annual festivals. As the war waged on, the leadership deficit grew and led to poor decisions, both on strategic and tactical levels, that eventually led to Athens’ defeat.

While Athens would be humbled by Sparta, Athens fell to Macedonia. Athens had grown dependent on the territory’s lumber for its navy, and Macedonia’s technological advances in ground warfare now mitigated Athens’ strength. Athens’ golden age was the product of self-discovery of a unique and unparalleled comparative advantage in naval warfare. Its bold commitment to the sea brought momentary wealth that allowed the best and brightest of the Greek world to rise to great heights in myriad aspects of civic and artistic life. Unfortunately, the particular system of taxation on allies was not sustainable (though Athens may have sustained it for a time if the plague had not greatly weakened Periclean Athens when it was best poised to succeed.)

The tragedy

The very balance of power in Athens produced by the bold naval undertaking stopped the coalitions (led quietly by the commercial elites and voiced by the Attic playwrights) that envisioned Athens at peace and prosperous from maritime trade. By the time Athens liberalized its relationships with its allies it was too late. Athens, like all the societies of its time, played a zero-sum game when it had the opportunity to be a non-zero-sum hegemon. Athens’ liberalism made it the ‘best man’ in the Greek world, but the hidden defects of the liberal political system proved that Athens was too flawed to lead.

Countries with comparative advantage in pears are more likely to also hold advantage in apples than chemical products, and Hidalgo’s research systematically explores the degree to which products are produced in tandem, allowing him to map the product space. Some products, such as vehicles and machinery, reside in the network core, while others, such as oil, raw materials, and agricultural products are located on the periphery throughout the 40-year period, suggesting that the capabilities required for these products do not lend themselves to the production of many other products.

Hidalgo argues that his product space mapping is a useful tool for the policymaker or entrepreneur, as it communicates which products are likely appropriate matches for a country’s production capabilities given a country’s product mix, as well as estimates the impact of various types of production on greater economic development (e.g., the capabilities developed through oil production won’t do much good outside of oil production).

Hidalgo also provides a more nuanced analysis of recent economic growth. In the 40-year period, Indonesia, Brazil, Turkey, Thailand, Malaysia, China, Korea, and Singapore most significantly expanded their economies. Brazil, Indonesia, and Turkey transformed their economies by expanding their at-first primitive product capabilities. China, Korea and Singapore already had relatively complex economies (judging by Hidalgo’s capability analysis), and their growth can be interpreted as the realization of latent economic potential due to improved governance and incentives. As Hidalgo notes, this distinction is significant for economic policy: it can be inferred that governance/incentive reforms will disproportionately catalyze complex economies with latent income potential like China, while quite possibly having little to no impact in countries with primitive product capabilities.

Brazil, Indonesia and Turkey may provide historical examples of economic development that are more useful to low-income countries without the latent economic potential of post-Mao China. While the importance of governance and incentive structures is widely accepted, the arguably more difficult challenge is to help countries like 1960 Brazil, Indonesia, and Turkey develop new and fruitful production capabilities when social returns dwarf the immediate private returns.

Like Dani Rodrik, Hidalgo advocates for more active industrial policy, “Like chaperones in cell biology, these [government] agencies would help catalyze the private sector’s own self-discovery process by helping to identify and develop capabilities that are necessary to move businesses into increasingly more sophisticated products.”

Whether or not an active industrial policy is sensical depends on whether governments have a comparative advantage (compared to private sector entrepreneurs) in discovering a poor country’s comparative advantage. I think the answer is context-specific, and I’ll leave that for another time.

Sandel anticipates my objection “that so-called obligations of solidarity are actually just instances of collective selfishness, a prejudice for our own kind. These critics concede that we typically care more for our family, friends, and comrades than we do for other people. But, they ask, isn’t this heightened concern for one’s own people a parochial, inward-looking tendency that we should overcome rather than valorize in the name of patriotism or fraternity?”

Sandel disagrees, citing examples of shame that ethnic groups feel for the behavior of their ancestors. He rightly notes that “pride and shame are moral sentiments that presuppose a shared identity.” I don’t disagree that nationality, for example, serves as a focal point; Americans are ashamed by the behavior of other Americans that might only offend a German. It would be hard to deny that such tribalism is natural. Sandel loses me when he argues that what is natural, ipso facto, is morally just.

Sandel proceeds to examine the cases of Robert E. Lee and David Kaczynski (brother to the “Unabomber”) in light of his moral perspective. As most are familiar, Lee opposed secession and slavery, yet not only turned down an offer to lead the Union army, but led the rebel forces out of allegiance to his kinsman in Virginia. While admitting it is difficult to defend Lee’s decision, Sandel finds “it is hard not to admire the loyalty that gave rise to his dilemma. But why should we admire loyalty to an unjust cause? You might well wonder whether loyalty, under these circumstances, should carry any moral weight at all. Why, you might ask, is loyalty a virtue rather than just a sentiment, a feeling, an emotional tug that beclouds our moral judgment and makes it hard to do the right thing? Here’s why: Unless we take loyalty seriously, as a claim with moral import, we can’t make sense of Lee’s dilemma as a moral dilemma at all. If loyalty is a sentiment with no genuine moral weight, then Lee’s predicament is simply a conflict between morality on the one hand and mere feeling or prejudice on the other.”

A fanciful way to restate the debate: if Lee’s tribal loyalty is moral, then it’s a moral dilemma, if it is not, it is not.

Sandel proceeds:

The merely psychological reading of Lee’s predicament misses the fact that we not only sympathize with people like him but also admire them, not necessarily for the choices they make, but for the quality of character their deliberation reflects. What we admire is the disposition to see and bear one’s life circumstance as a reflectively situated being—claimed by the history that implicates me in a particular life, but self-conscious of its particularity, and so alive to competing claims and wider horizons. To have character is to live in recognition of one’s (sometime conflicting) encumbrances.

Unless I am really missing something here, Sandel’s claim for the morality of Lee’s decision lies in the facts that a) some people sympathize and admire people like him, b) the decision was the product of careful deliberation, and c) a particular life will have a particular context. I do not find these justifications sufficient. If you accept that humans are not perfectly moral in nature, then there is a (strong) possibility that humans might admire a decision that was carefully arrived at and yet immoral.

Sandel then argues that you cannot explain David Kaczynski’s difficult decision to turn in his brother unless you appreciate the moral import of family loyalty. While David made a different decision than Lee, “the dilemmas they faced make sense as moral dilemmas only if you acknowledge that the claims of loyalty and solidarity can weigh in the balance against other moral claims, including the duty to bring criminals to justice. If all our obligations are founded on consent, or on universal duties we owe persons as persons, it’s hard to account for these fraternal predicaments.”

I completely disagree. Evolutionary studies have done a pretty effective job of explaining such fraternal predicaments. Fraternal loyalty has been an evolutionary advantageous trait. Humans exhibit it. The fact that Joe Blow wants to start bow-legged Joe Blow, Jr., at shortstop on his little league baseball team does not mean that this nepotism is the least bit moral; it does suggest that natural selection has conditioned human behavior.

To restate my objection, Sandel equates humans’ natural behavior with morally-just behavior; a slight of hand that avoids engaging the moral question at hand. In the end, his argument fails to dissuade me from that “familiar idea of freedom … the idea that says we are unbound by any moral ties we haven’t chosen; to be free is to be the author of the only obligations that constrain us.”

“We want gold on credit. Everyone in our village does,” Monitor Focus Group, Andhra Pradesh, India

Microfinance has been getting negative attentions from all corners for its debatable impact on economic advancement, but part of the problem may be that it it swimming upstream:

Status symbols matter everywhere. It is no western slight to readily accept that this phenomenon translates from Trump Tower to Bacongo; on the contrary, it’s a necessary precondition to creating a successful market strategy for your social intervention:

Yet our study found many examples of enterprises and inventors who focus on the development of novel technologies, products, and services the poor are presumed to need and want. Like the NEST solar lantern or the Venus burner, products well-designed for low- income markets often still fail to sell in significant volume, flouting Business 101 in obvious ways: by misperceiving what low-income consumers want to buy when they can afford it or have access to credit; and by misunderstanding their cash flows, or absolute ability to pay.

Disclaimer: This is not intended as a slight against microfinance or support for “Sun King” philanthropy. I simply point out that the intended beneficiaries of many a social entrepreneur’s benevolence are oft treated as passive recipient abstractions that reflect the entrepreneur’s own hopes and concerns, rather than real, independent-minded human beings who should be accorded (at the very least) the respect of a paying customer.

The breadth and depth of the data set powers some startling factoids.

For example, upward mobility is local:

… a simple analysis of variance across communities shows that only 25 percent of the variation in upward movement of the poor can be attributed to the study region or country; the remaining 75 percent depends on the community.”
…

We focus on the effectiveness of democracy at the local level, irrespective of the state of democracy at the national level. At the local level, we find that there is much more variation within countries than across countries; indeed, 93 percent of the variation in the quality of local-level democracy is explained by within-country variation. Hence, the importance of understanding how local politics affects poor people’s efforts to move out of poverty.

When asked to cite the reason behind their household’s move out of poverty, individual initiative was cited 77% of the time. NGO assistance? 0.3%.

That is not to say NGOs have no role to play. Narayan et. al frame their vision for bottom-up development focused on local political and economic development:

Collective action that involves federated organizations of poor people has the potential to transform lives by connecting poor producers to markets and involving them in economic activities higher up the value chain. But creating such organizations takes time and financial resources and does not produce immediate returns; as a result, this is an area of investment failure on a massive scale. Such a transformation in thinking and practice is not easy. It requires the coming together of people who understand local realities and community organizing, on the one hand, with people who possess capital, business skills, and market access, on the other. As long as these two groups, civil society and private business, remain at war, poor people will remain excluded from markets, and important innovations, including poor people’s corporations and changes in mainstream business models to ensure fairer returns, will not be achieved.

What does local economic assistance look like?

Chapter 5 discusses interventions to increase prosperity at the local level and make markets work more fairly for poor people’s tiny enterprises. The business climate for poor people is very different from the one that large businesses enjoy. We call for liberalization from below. This includes removing restrictive government regulations; expanding access to markets, especially by providing connectivity through roads, bridges, and telephones; and integrating poor people’s businesses on fairer terms in new business models. Poor people’s economic organizations and business know-how are very important in helping them overcome problems of scale and move up the value chain in order to get higher return for their labor.

And role of local political leadership?

But the combination of good local leaders, fair elections, improved access to information, participation, and collective action can enable poor people to demand accountability from local leaders. Local leaders can do much to liberalize and expand economies from below.
…
They do so through two channels—one community-wide, the other individual. They can provide essential community services like health and schooling, secure law and order, and make and enforce rules and regulations that favor livelihoods and poor people’s initiative. Local officials also distribute government aid to households, including food, agricultural inputs, houses, and land. They may provide skills training through a variety of agricultural extension and nonagricultural training programs.

I’d highly recommend checking out the various Moving Out of Poverty publications; whether you’re interested in India, Afghanistan, or more general poverty analysis based on 60,000 interviews, there is good reading to be had.

Eubank posits that because the Somaliland government did not benefit from aid revenues, it had greater incentive to reconcile with the local commercial interests, which, in turn, had a vested interest in peace and stability that served the country well. Somaliland indeed appears to have taken major steps forward since its decimation by civil war, rebuilding cities and towns, and increasing schooling and commercial activity. A UNDP/World Bank survey finds that Somaliland has significantly higher average income than Somalia proper, a reversal of the prewar distribution, with superior health statistics as well.

Folks like Dambisa Moyo have received recent attention for their criticisms of state-directed aid, and Somaliland serves as an excellent, if not wholly generalizable, case study in development without state aid.  The theoretical advantage of aid-less development is that the government is dependent on its citizens for its revenues, and because “citizens and businesses can resist taxation, and by doing so increase the costs of tax collection, decreasing its efficacy, dependency on tax revenue creates a de facto mechanism of accountability which can be employed even in the absence of effective de jure accountability arrangements.”

Somaliland stands in stark contrast to most of sub-Saharan Africa, where, “in 2005 there were 16 sub-Saharan countries in which the ratio of foreign assistance to government expenditures is greater than 50%.” If Somaliland received an amount of state aid proportionate to the median sub-Saharan country, the government would have had control over approximately $94 million from foreign sources, triple its annual revenues.

Eubank argues that the absence of this external funding has allowed Somaliland to develop:

First, a lack of outside financial support increased the influence of the business community, which provided all government financing. Because pastoral economies are dependent upon stability and management of public goods like water and grazing lands, the influence of the business community has proved to be supportive of political reconciliation.
…
Second, with a large number of political actors with relative parity in terms of resources, a lack of outside support has forced compromise and co-option of opposition groups.
…
Somaliland government did not have an independent revenue base, making it dependent upon the continued support of its constituents.

The post-secession history of Somaliland is certainly not neat and orderly. The clans that came together to win their independence were unable to sustain their coalition, and the postwar transitional government broke into warring factions. The government and its opponents fell into a bloody struggle for power, with the government attempting to cease the Port of Berbera in order to fund its fighting. The government, however, was not strong enough to wrest control of the port from the opposing clan. With little hope to sustain itself, the government was forced to the bargaining table.

The peace conferences that followed were funded by local communities and the agenda largely reflected their interests, leading to broader government representation and a president favored by the port businessmen. Those early years saw additional fighting, but the government was again forced to reconcile with its opponents because it did not have the power to combat them. Civil society, thanks largely to the vested interests and relative power of commercial stakeholders, successfully pressured the government to preserve peace and stability.

Government decision-making and financial power have since remained relatively decentralized under a constitution constructed to prevent state predation. Somaliland is now “one of the only governments in Africa with ‘cohabitation’ between rival parties in the executive and legislative branches.” As an analyst put it in a  2009 Human Rights Watch report: “Some in the government don’t believe in our democratic process, but no one has enough power to destroy it.”

Since the civil war, the government has been dependent on business both for loans and tax revenues. The businessmen, for the most part, had a personal stake in “freedom of movement; freedom of trade; access to common grazing areas; access to common water sources; and the return of private property.” This is not to say their influence was wholly benevolent: livestock owners saw an opportunity to secure a monopoly of the market through politics, and did so, driving out smaller competitors. But by and large, business men positively influenced development: pressuring politicians to maintain stability and economic freedom, paying alms for social services, and conducting development projects.

As Eubank allows, the case of Somaliland is not necessarily generalizable:

Somaliland lacked natural resources that would have reduced government dependency on local revenues even in the absence of aid; it had some degree of parity among different clans, which prevented a single group from dominating others; commercial actors had an interest in promoting peace because of the nature of pastoral economic production; and the country’s relatively strong traditional institutions were able to mediate equitable agreements once resource constraints forced parties to the negotiating table.

While all of these characteristics are important, I would focus on the nature of dominant economic activity (e.g., pastoral production rather than natural resource extraction). The interests and power of the local businesses allowed Somaliland to follow a path similar to any student of European economic and political development:

Researchers studying state formation in medieval Britain and the Netherlands have argued that the modern, representative state emerged as the result of negotiations between autocratic governments who needed tax revenues in order to survive inter-state conflicts on the one hand, and citizens who were only willing to consent to taxation in exchange for greater government accountability on the other. In these historic cases, government dependency on local sources of revenue provided those in control of economic assets with significant leverage over the government which they were able to use to demand the development of more accountable and representative political institutions though a process generally referred to as “revenue bargaining.”

This revenue bargaining was only possible by the absence of state-directed foreign aid. Somalia provides an illustrative example of the impact of aid:

Somalia was Africa’s largest per capita recipient of international aid in Africa (with the exception of micro-states such as Gambia) [during the 1980's]. These huge inflows of aid money, especially from the U.S., made it possible for the Siad Barre government to establish a patrimonial system wholly disproportionate to the productive economy. Indeed, it was the aid flows that made possible the strategy of assaulting the productive sectors such as agriculture and livestock. (de Waal)

While Somaliland is but one case study, it should set off some alarm bells. Beyond questions of state-directed aid effectiveness, second-order effects on the natural political development process suggest that aid might be better directed at the citizens themselves, or at least at the local communities. Rather than reinforcing existing state structures, outsiders might better serve inhabitants by helping the individuals increase their economic and political power in order to secure a better deal at the bargaining table with government.

Visa expansion is competing for airtime with debt forgiveness and disaster relief, and it’s worthwhile to restate the human value of greater immigration. As Michael Clemens and many others have reported, 50% of Haitians wanted to leave Haiti before the disaster. Last year, following an earlier natural disaster, the US refused to grant temporary protected status to Haitian immigrants and proceeded with deportation hearings. Thankfully, the US has granted TPS to immigrants in the wake of the latest disaster.

Yet the US could do significantly more good by taking the next step and opening its doors, even if on a temporary basis, to Haiti’s poor and huddled masses. Such a policy may even find broader support than TPS, which touched on the political nerve of protecting immigrants in the country illegally.

The US currently permits 21,000 Haitian immigrants and handed out only 498 temporary season work visas last year.  A dramatic expansion of even the work visas would help both the immigrants and Haiti itself. As Clemens notes, “A high school dropout in the United States earns an average of $24,000 a year — about seven times the wages of a typical Haitian worker.”

Such a policy would not doom the Haitians that remain. For one, it would provided needed capital through remittances, already a large percentage of the Haitian economy (to the tune of $2 billion a year). Second, if the visas were temporary it would Haiti’s long-term economic capacity. Most fundamentally, it would support higher wages in Haiti by decreasing population pressure.

To use an example I cited in a previous post, Ireland’s potato famine precipitated a mass exodus. Because of the corresponding reduction in labor supply, “real wages in Ireland relative to the United Kingdom never fell and gross domestic product (GDP) per capita never fell.”  Similarly, the collapse of industry towns in US met with a decline in population that also mitigated wage losses. When the optimal level of population decreases, a commensurate migration is best for all involved.

Pritchett contrasts these scenarios with immobile Bolivia:

In contrast, Bolivia had a clear negative shock as well, but one that occurred in a period in which there was little or no international labor mobility. So, rather than the shock being accommodated by changes in population while real wages of Bolivians remained constant (both in Bolivia and elsewhere), real wages in Bolivia fell spectacularly.

While counter intuitive in some ways, the best chance for Haiti is for many to leave. The best opportunity for those who want to leave is to head to the US. Due to Haiti’s small size, the US can accommodate these people-in-need without a measurable impact on the economic well-being of its population. Disaster relief is necessary. Debt relief can help. Temporary work visas (at the very least) should be at the forefront of any moral crusader’s policy push.

At least a part of the answer to the TFP puzzle seems comes from massive misallocation of resources within the same economy, something that is not picked up by any of the macro aggregates that are used in growth accounting exercises. These misallocations are not the product of any one distortion but rather the cumulative effect of many, many individual distortions resulting from both government failures and market failures. Banerjee and Duflo (2005) describe the evidence for these distortions in some detail drawing on range of micro-​studies. They then carry out a heuristic exercise to assess whether the extent of observed misallocation is large enough to explain away the IndoUS TFP differences. Their answer, which they propose quite tentatively, since what they do is no more than a finger exercise, is yes: If we are willing to assume a model where there is some increasing returns at the firm level, the fact that the medium firms in India are too small and too numerous relative to what they would be in an efficient economy, can actually explain the entire TFP gap.

Hsieh and Klenow (2006) use data from firm-​level annual surveys from the US, China and India to carry out a much more empirically founded version of the same exercise. They calibrate a model of monopolistically competitive differentiated firms using this data and show that the allocation of resources across firms within the same industry is indeed much more distorted in both India and China than in the US, and that in particular it is most productive firms that are too small in both those countries. If these countries could achieve US-​level efficiency in the allocation of resources within the same industry, they calculate, TFP would go up by 30-45% in China and 45-50% in India. Clearly there may also be misallocation across industries, which would presumably add to this total.

Banerjee’s working paper adeptly sketches the limits of macro analysis, and the potential impact of micro-level intervention:

For example, it seems clear that fertilizer is massively underused in parts of Africa: the question is to what extent this is a result of an unwillingness to take risks, the unavailability of credit, the lack of the right internal or external incentives for long-​range planning, distortions in the land market or a lack of understanding of the benefits of fertilizer. This is the kind of problem that is probably best addressed by a combination of theoretical thinking and experimental work, exemplified by the work of Duflo, Kremer and Robinson (2007) on fertilizer adoption in Kenya. Their results clearly suggest that a part of the problem is a lack of ability to commit to a long-​range plan and that a simple contract that solves this commitment problem can massively increase fertilizer adoption.

This is no doubt only a part of the answer: And it is possible (though hardly obvious— there many NGOs in Kenya) that there is not enough implementation capacity in Kenya to provide the needed contract to everyone. On the other hand, once the need is well understood, there is no obvious reason why the market would not start to offer it.

USAID utilizes various performance metrics to promote transparency, incorporating the measures into annual performance and accountability reports in accordance with the Government Performance and Results Act of 1993 and the Reports Consolidation Act of 2000. This paper identifies the shortcomings in the performance indicators related to the strategic goal of promoting economic growth and prosperity (see Appendix), and offers alternative measures and direction for metric development. Performance indicators guide agency planning and accountability, and USAID would benefit both operations by employing better focal points.

In fiscal year 2008, USAID conducted 117 evaluations, assessments, and special studies in order to assess the agency’s promotion of economic growth and prosperity, but failed to produce metrics that communicate the agency’s public benefit or cost-effectiveness. In November 2009, the Office of Inspector General noted that “managing for results” was an area in need of improvement for USAID, and specifically referenced problems with the relevance and accuracy of performance measures. USAID responded that it was working to better prepare operational units for performance planning and reporting, but did not express intentions to address shortcomings in the metrics themselves.

The Mercatus Center at George Mason University reviews the quality of federal agencies’ performance reporting, and, in May 2009, noted several deficiencies in USAID’s efforts: few measurable and mostly intermediate outcomes, lack of strategic objectives, raw number measures rather than percentages of end goals, and budget costs only connected to the broad strategic goals. The Mercatus report criticizes USAID for failings endemic in many reviewed agencies: metrics are focused on outputs and fail to communicate the actual public benefit of the agency’s work. Some indicators do measure benefit, such as the number of people with access to modern energy or internet services; however, these measures are vague, only tangentially related to the strategic goal of economic growth, and less relevant to the measure of prosperity than change in income, for example.

The assessment of agency impact on economic growth and prosperity can be difficult. USAID efforts are affected by factors outside the control of the State Department, such as macroeconomic conditions, the cooperation of other donor governments, and the commitment of foreign governments to implement the agency’s plans. In some cases, it might not be possible to isolate the precise causal relationship of a USAID program on the development of beneficiary income or productivity. In addition, impact evaluations can be costly to conduct. Yet none of these complications are insurmountable.

Other agencies have overcome these same challenges in order to measure tangible impact on economic prosperity. The World Bank’s Results Measurement System tracks development effectiveness through measures such as gross domestic product per capita, and the population percentage living on one dollar a day. Franck S. Wiebe, Chief Economist of the Millennium Challenge Corporation (MCC), developed a monitoring and evaluation program for MCC rooted in quantifiable impact on the premise that any agency concerned with reducing poverty needs to demonstrate its effect on income. Wiebe notes that health, education, and other quality-of-life issues related to USAID’s strategic goal of prosperity are also positively correlated with increased income.

USAID should measure agency impact on beneficiary productivity and income as proxies for economic growth and prosperity, respectively, rather than simply counting the number of rural households benefiting from US interventions in agriculture. Following the example set by MCC, USAID could then utilize the new outcome metrics and existing cost data to better understand and communicate the agency’s development efficiency and effectiveness. The processes that generate economic growth and prosperity can vary by time and place, and it follows that agency impact on growth and prosperity cannot be understood by output measurement. Performance accountability that focuses on specific processes or outputs may lead the agency to focus on strategically unproductive activities. MCC spent two percent of its $6.4 billion of expenditures on monitoring and evaluation through March 2009. A similar investment and commitment to measuring USAID’s impact on beneficiary income and productivity is a necessary step towards ensuring that USAID is effective and efficient in its promotion of economic growth and prosperity.

Appendix

The evidence of the Mariel boatlift of a huge influx of workers into a single labor market (Miami) shows little impact on employment or wages (Card 1990). Even Borjas’s (1999) regression evidence that the labor movement of nationals is affected by the patterns of migration and hence the impact on the national labor market needs to be considered shows that only 4 percent of the decline in the real wage of high-school-educated workers can be attributed (and the cross-state regression evidence was apparently driven by the experience of California).

Given that national legislation involving a similarly “huge influx of workers” is politically impossible, the economic fate of low-skilled nationals will not be much affected by foreign labor for the foreseeable future. For those whose concerns stand unabated, Pritchett takes another tact:

The economists’ usual response to distributional arguments against efficient policies is “instruments to targets,” and for economists to resist migration on this ground while advocating free trade is intellectually inconsistent.

For fear of some anti-free traders remaining unimpressed, I would add that we also don’t allow distributional considerations to take precedence over more efficient technological innovations.  I don’t expect this counter-argument to impress anti-free traders in isolation, but free labor has the advantage over free trade in that the direct benefits accrue to those most in need; folks against an unskilled labor influx out of a concern for distributional effects would do well to consider Pritchett’s points in the previous post on the morality of labor mobility.

It would do the case for labor mobility a disservice, however, to simply argue that it wont harm national interests. I won’t waste kilobytes on the obvious benefits of allowing in more labor that firms want to pay to create products, but Pritchett does offer useful clarity on foreign labor as a way to address the problems facing aging industrial countries:

The populations of Germany, Japan, and Italy have already begun to shrink and, for Italy and Japan, are projected to be only 60 percent of their 2000 size by 2050. France and the United Kingdom will remain roughly the same size during the next fifty years. Among large industrial countries, only the United States is expected to continue to experience sizable population growth (these projections already assume some level of migration).
…
Current projections show support [to retiree] ratios falling in Germany from 4 to 2, and in the more dramatic cases of Italy and Japan they fall to about 1.5—only 1.5 workers for every retiree. The systems of social transfers in Europe can be sustained only with very high tax rates even at current support ratios and program design parameters (which include a combination of tax rates, ages, benefits, and so on). But if support ratios fall to anything like projected levels, then it is not clear that there are politically feasible combinations of design parameters that can make the systems solvent—either tax rates need to be too high or retirement benefits drastically curtailed.

This country-specific focus foretells of Pritchett’s final recommendations for bilateral labor agreements, which I’ll explore soon. More generally, it stirs a hope that the industrial nations will soon understand that it is in their economic interest to allow in young, tax-paying workers to correct their demographic imbalances.