Thursday, February 14, 2013

Reflections on Aid Effectiveness

SOME REFLECTIONS ON AID EFFECTIVENESS

By Ajit Chaudhuri


‘If you do not know where you are going, any road with get you there.’: Lewis Carroll


The past twenty years have seen many changes in the development sector. Where once the government was the critical agent of change, the baton has passed to NGOs, the private sector and, more recently, back to the state and to government-owned NGOs and panchayati raj institutions. Where once there was a comparatively equal relationship between the providers of resources and the implementers of interventions (or at least a semblance of a dialogue), funding agencies now exercise absolute power. Where ‘primary education’ was once seen as the critical sector, whose benefits lead and direct change in other sectors relating to development, ‘governance’ and ‘livelihoods’ have usurped that role. And finally, the positive relationship between development aid and development, that was once taken for granted, now has to be proved beyond doubt. It is this, the increased importance of aid effectiveness in the development discourse, that is the subject of this paper.


Aid effectiveness is defined as the extent to which an intervention has attained, or is expected to attain, its major relevant objectives efficiently, in a sustainable fashion, and with a positive institutional development impact (as per the Glossary of Key Terms in Evaluation and Results Based Management of the Development Assistance Committee of the OECD). Put simply, it is a measure of (or judgement about) the merit or worth of an intervention, and it addresses the question of whether one’s resources and efforts have brought or are bringing about desired change (or showing results). Put complicatedly, it is about whether an intervention is relevant, efficient, sustainable, and with impact. And the development sector has seen the burgeoning of an ancillary industry in the field of monitoring and evaluation to address these questions.


The need for monitoring and evaluation is aptly described in the following statements –

• If you do not measure results, you cannot tell success from failure.

• If you cannot see success, you cannot reward it.

• If you cannot reward success, you are probably rewarding failure.

• If you cannot see success, you cannot learn from it.

• If you cannot recognize failure, you cannot correct it.

• If you can demonstrate results, you can win support.


This is all very well, and this author hesitates to dispute the need for addressing questions around aid effectiveness, or for setting up monitoring and evaluation (M&E) systems to accomplish this. This paper does, however, look to question the hugely increased, and rapidly increasing, role of M&E within development, especially in proportion to the tasks of actually managing and administering development programmes. It does so by highlighting gaps between rhetoric and reality in the field of M&E. It suggests that, beyond a point, this is a ‘socially useless activity’ driven primarily by the needs of its proponents, and it distorts development aid by directing funds towards interventions wherein results are easily quantified and quickly discerned.


The first set of difficulties relating to aid effectiveness applies to evaluators.


An M&E system requires the outlining of objectives, inputs, activities, outputs, outcomes, targets and indicators for a development intervention, and the setting up of systems to collect, collate and analyze data around these and to disseminate information to different levels in a timely manner. At issue is the assumption that objectives are known, clear and consistent; this is at variance with all experience – they are usually multiple, conflicting, vague and occasionally repugnant, mirroring the complexity and ambivalence of human social behaviour. Choosing the objectives against which to monitor and evaluate invariably has little to do with an intervention’s actual purpose and a lot to do with ease of computation. Also at issue is the difference between outputs (defined as ‘the products, capital goods and services that result from an intervention) and outcomes (defined as ‘the short or medium term effects of an intervention’s outputs’), which serves to discern whether an intervention is merely ‘doing the work’ or actually ‘achieving results’. On the theoretical drawing board, the difference is like night and day; in the field, the chances of getting unanimity on an intervention’s outputs and outcomes is less than those of getting Afghan warlords to agree upon a peace plan.


Another matter is that of impact! By definition, impact happens in the medium to long term – often well after an intervention has ended – and it is rarely attributable to a particular intervention. The resources for an impact assessment are, however, available as a part of the intervention – either towards its end, or in its immediate aftermath, but never five (or whatever) years after the intervention when it is somewhat assessable. And the debate around attribution is circumvented by the attempt to show ‘contribution’ towards broad change, with nobody knowing quite what ‘contribution’ is.


And finally, can an evaluator actually trash a bad intervention or wholeheartedly praise an excellent one? The politics around M&E make this difficult, especially as people’s (including the evaluator’s) livelihoods are at stake. The latter leads to accusations of delivering a ‘snow job’, and therefore the need to throw in a few perfunctory negatives. The former leads to competing explanations about an intervention’s failure, and therefore whether it should be abandoned (the ‘theory of change’ underlying the intervention is weak), continued as it is (it has had insufficient time to achieve its objectives), continued with changes (its implementation is weak) or enhanced (it has insufficient resources to achieve its objectives) – and the directions set are invariable based upon political judgement rather than analytical integrity.


The second set of difficulties relating to aid effectiveness applies to the implementers of development interventions. Operations people are notoriously uninterested in data collection – their task is to make things happen, not to fill forms so that M&E personnel can later make suspect use of the information (including making M&E people look good and operations people look bad). M&E systems typically create rules and reporting requirements for implementers that divert them from their actual work and create perverse incentives towards a focus on short-term results and a stifling of innovation. A standard grouse in most implementing organizations in the field of development today is the amount of time spent, at all levels, dealing with compliance issues that have little relation to or bearing on their work.


A paper by Andrew Natsios of USAID entitled ‘The Clash of the Counter-Bureaucracy and Development’ in 2010 (available at www.cgdev.org) identifies two basic causes for this dysfunctional state of affairs. The first is the rise of a group of people he calls the counter-bureaucracy, who deal with issues of accountability and oversight and who pressure for increased scrutiny of aid effectiveness and for clearer demonstration of value for money. The second is what he terms ‘obsessive measurement disorder’ or the belief that the more an activity can be quantified, the better the policy choices and management of it will be. The two combine to cause ‘goal displacement’ – increasing the importance of formalistic goals over the substantive goals of an intervention and creating a situation wherein donor goals (that are largely set by the counter-bureaucracy) do not reflect the goals of the recipients of aid. Natsios says that it is a great pity that support for development interventions that can be transformative, but whose results are harder to measure and often do not emerge for years, is diminishing. He also makes some suggestions for issues around the effectiveness of aid. These include –

1. Devising a new measurement system for results that acknowledges that short-term quantitative indicators are not appropriate for all interventions.

2. Adopting different M&E methods for interventions in service delivery, institution building and policy reform.

3. Researching the effect of the counter-bureaucracy on aid effectiveness with a view to reducing the compliance and reporting burden.

4. Overtly recognizing foreign policy as an objective of some interventions, and judging these against political rather than development objectives.

5. Ending the use of disbursement rates as a performance measure.

6. Devolving programming and decision making to the lowest possible level.


Most development practitioners would find connection with Natsios’ views. This author, with 20 years in development behind him, would like to add that many issues around aid effectiveness stem from the fact that a critical mass of people in positions of power within the development sector have never actually managed an intervention at a level at which they have to interface with a ‘beneficiary’ community (a result of recruitment policies that parachute bright young people into the headquarters). To such people, as a wag remarked ‘poverty is like Bihar – never been there, but don’t like it anyway’. There is a conflict between their own belief that implementation is a grubby chaotic thing best left to the foot soldiers, and the knowledge that it is the basis for a development agency’s existence. The resultant insecurity sets aid effectiveness up as an instrument of power and control, rather than as a tool for the better delivery of development services. It is time for a re-think!

Monday, February 11, 2013

Sex and Central Banking

SEX AND CENTRAL BANKING

Ajit Chaudhuri, February 2013


'The only useful banking innovation was the invention of the ATM': Paul Volcker


Allow me to meander through three unconnected events before getting to Paul Volcker, inflation and bank regulation, which this paper is actually about.


One of the events that a fellowship at the London School of Economics (LSE) entitled you to gatecrash back in 2001 was the annual meeting of the UK-Germany Economic and Commercial Cooperation Society (or some such thing). I had imbibed too much wine with my lunch while there, and was therefore not prepared for what followed – a long and excruciatingly detailed talk on macro-economic policy by the then President of the Bundesbank, Ernst Welteke. When the torture finally ended, I mentioned to the others on my table that there should be a ban on central bankers speaking after lunch. They concurred, but also said that there was something comforting about Herr Welteke’s boringness – that the very qualities suitable for a person charged with the monetary policy of a nation were those that made for dull oratory. It seems a natural law that central bankers have the effect of chloroform on others. At a subsequent seminar at LSE, another speaker was discussing the cultural barriers to European integration and gave the example of Germany and Italy. To Germans, he said, Italy is a place one only goes to on holiday. And to Germans, all Italian men are gigolos – because that is their experience while they are on holiday. Germans, therefore, cannot conjure up an image of an Italian central banker – a huge barrier to discussions on formation of a European central bank with shared responsibilities and rotating leadership.


On a rare TV-watching foray away from sports channels, I came across a discussion on the slowing Indian economy and possible courses of action. The speakers, purporting to speak in the public interest, were castigating the government for being held hostage by the RBI’s (India’s central bank) refusal to lower interest rates. It was unusual to observe such unanimity on TV!


I recently read a biography of Steve Jobs (‘Steve Jobs’ by Walter Isaacson, Simon and Schuster, 2011), and this had me thinking about the concept of ‘greatness’ again. Is it the preserve of the rich and charismatic, of those who have built something from nothing, who have changed the way we do things, who have seen something others did not, or who have fought and won wars? What is the scope for those who have lived rather more ordinary lives, who have preserved and prevented rather than created or destroyed, who have not wowed the world with products and thoughts? Are only the former worthy of our awe? Or can the dull post-lunch speakers too aspire to greatness?


The financial collapse of 2008 soiled many reputations – within the financial industry, and among those entrusted to keep it in check. It also enhanced a few, and a man called Paul Volcker’s was one of these. This note attempts to make a case for Volcker to be considered ‘great’ – despite him being gawky in appearance (he’s over 2 meters tall), only comfortably well off (rather than obscenely rich) and, yawn, yawn, a central banker to the core.


Volcker’s achievements can be described through three episodes.


The first was his time in the Treasury Department (1969-1974), when he oversaw the abandonment of the post-1945 Bretton Woods arrangements that pegged the value of the dollar to gold, and of other currencies to the dollar at fixed exchange rates. As the Vietnam War escalated, demand in the US grew without accompanying increases in productivity, resulting in rising prices and, because of the inability to devalue the currency, uncompetitive exports. As investors began fleeing to other currencies, the US decided in August 1971 to end the dollar’s peg to gold and to usher in an era of flexible exchange rates. Volcker was entrusted with ensuring an orderly transition. Thanks to a combination of negotiation and coordination, the Bretton Woods arrangements were dismantled without sparking off a full-blown financial crisis. The relevance of this episode is still significant in the light of the Euro-zone’s struggles to cope with the havoc of maintaining fixed exchange rates.


The second was his war on inflation as Chair of the Federal Reserve Bank (or the Fed, the US’s central bank). In the 1970s, inflation was the bane of the US’s economy (12 percent in August 1979, a month after Volcker took over). Inflationary expectations had deeply set in, and had set off a ‘wage-price spiral’ – in plain English, wage negotiations that assumed 5-7 percent inflation and resulted in 7-9 percent wage increases, in turn causing prices to rise still further. Volcker designed a new Fed policy of explicitly slowing growth of money supply (rather than a central bank’s normal method of raising interest rates directly), forcing the US economy to slip into recession and its associated problem of unemployment (which peaked at 10.8 percent in late 1982). He stuck to his guns despite withering criticism from the US Congress and industry, and stayed the course until inflation climbed down. He then cut interest rates and made it easier to borrow money. Unemployment fell rapidly, and conservative economists (including Milton Friedman) warned of overheating and an imminent return to inflation. But Volcker saw the Fed’s worst failure as one of waiting too long to tighten monetary policy during the expansion, not of loosening too much during recession. History proved him right – a record breaking expansion followed, and inflation never returned.


The third was his championing of a ban on proprietary lending (when a firm trades financial instruments with its own money, rather than its customers’ money, so as to make a profit for itself) by commercial banks – now called the ‘Volcker Rule’. His reasoning was that commercial banks (where citizens keep their savings) are backed by deposit insurance and can borrow money from the Fed at a discount in a crisis, and this enables their access to cheap capital. Proprietary lending therefore involves using a state subsidy to make risky investments that leave the taxpayer on the hook if they fail – a sort of ‘heads I win, tails you lose’ situation. It also invariably puts banks in direct conflict with their clients. Volcker’s critics contend that the rule is untenable because commercial banks have to compete with entities (hedge funds, money market funds, international banks, etc.) that are not subject to these restrictions. There was furious lobbying to remove it – yet each time the rule looked in jeopardy some development would validate Volcker’s logic, such as news of Goldman Sachs knowingly shorting investments it was selling to its clients, or JP Morgan Chase losing billions on a single proprietary investment.


Indians have another cause to remember Volcker – he investigated the UN’s oil for food racket in Iraq that brought down our then foreign minister, Natwar Singh. Interestingly, our politician-bureaucracy mafia didn’t resort to their usual shenanigans in the report’s aftermath; gang-up, counter-accuse the investigator of racist bias, obfuscate by questioning the motivation, basis, methodology or numbers, etc. (the stunts being pulled on the Comptroller and Auditor General today). Volcker’s reputation and methodological rigour were impeccable and irreproachable – the @##&@# simply
shut up and resigned.


Great careers offer lessons to others, and Volcker’s is no exception.


To policy makers, the critical lessons are that of projecting confidence and credibility, and of articulating clear frameworks to resolve crises. Volcker understood that a government had to establish credibility in order to give policy makers the flexibility to act. In both the gold and inflation crises, it was the failure of authorities to make credible promises that invited speculative attacks by investors betting that the government would back down. In the 1980s, once people believed that Volcker was willing to administer the most painful medicines, and to keep at it until prices stopped ballooning, he earned the flexibility to bring inflation down to normal levels. Policy reversals undermine credibility and make rescue much more difficult – a lesson proved relevant by Europe’s chaotic response to its sovereign debt crisis. And also, serious crises cannot be tamed solely by improvised disaster control by well-intentioned officials – it takes explicit frameworks, that leave people in no doubt what the government will do when things go wrong. A benefit of a preference for frameworks over emergency meetings is, according to Milton Friedman, that it puts an end to the ‘occasional crisis – that produces frantic scurrying of high government officials from capital to capital’.


Volcker was tough on regulatory oversight. He believed that free markets are unable to govern themselves, that they can function only if people trust the system, and that conflict of interest and creative accounting are dangerous precisely because they destroy public trust. He said that bankers, like everyone else, would try to take advantage of a system that lacks oversight – and many so-called financial innovations are actually ways for firms to get around regulations or to avoid taxes, thus providing little benefit to consumers or to the economy. He articulated the need for clear and direct oversight of banks’ behaviour, saying that ‘commercial bankers understand when a bank examiner gives them a green light to lend. They also understand a red light, whether they like it or not, but most ignore the cautionary yellow.’


My own key take from Paul Volcker is his contention that honour is the most important thing a person has (he remembers that, in his earlier days in government, no banker worried more about his bonus than his reputation), and that public service is the most important thing a person can do – despite the modest pay and the considerable tribulations of government work.


To those of you still here, I would like to return to my question in page 1 of this note – can a man such as this be considered great? I am not sure I make a convincing case – there is something ‘unsexy’ about interest rates, financial regulation, and a career spent ensuring that the small guys sleep at night.


Further reading for those interested:

Goolsbee, Austan; The Volcker Way: Lessons from the Last Great Hero of Modern Finance; Foreign Affairs; January/February 2013

Silbur, William; Volcker: The Triumph of Persistence; Bloomsbury Press; 2012