Friday, August 24, 2007

How to Improve Governance

This will be my last post for a while as we are off to Burning Man and then a few weeks of hiking in Utah. What better way to celebrate than to talk about Governance again.

In a comment on my last post, Mike Gallagher suggested that the tools to improve governance are weak. This certainly matches what we have seen in our travels. According to friends we talked to in Guatemala, a group of legal experts from a major US university came down to Guatemala a few years ago to help improve the legal system. After many months and much money spent they gave up in frustration. They had accomplished nothing.

We also encountered a couple of law students in Coban who were working on the war-crimes trial of Rios Monte. Rios Monte was head of the Guatemalan government during the time when some of the worst atrocities of the civil war took place, and many people feel that bringing him to justice would be a big step towards bringing a rule of law to Guatemala. As usual, things are not that simple. It turns out that in the areas like the Ixil triangle where the worst of the fighting occurred, Rios Monte enjoys tremendous popularity to this day. He generally gets about 90% support from the indigenous population, who view him as a hero that helped stop the violence. To many people a war-crimes trial for Rios Monte would be yet another travesty in a long history of injustice.

Governance is not something that can be imposed on a culture. I’ve seen myself in Guatemala, and the world has seen it in Iraq. Governance is something that comes from within, and I believe that ultimately it happens for mainly selfish reasons.

As cynical as it may sound, government is the tool by which the rich and build and preserve their wealth. As a result, when the rich and powerful are a small, closed group we generally end up with some form of authoritarian system. The best way for a small group to get rich is to plunder a country. As long at the dictator funnels enough money to the powerful things generally run fairly smoothly.

When the rich and powerful form a larger group however we generally end up with something more democratic. It is no accident that the wealthiest countries are all democracies. The reason is that the spoils of an authoritarian system are hard to scale. When there are tens of thousands of rich business owners, all of whom want a slice of the pie, it is hard for any central government to keep them all happy simply by plunder. This is not only because corrupt governments can only split the pie so many ways; it is also because corrupt governments stop the pie from growing. At some point there is more money to be made from economic growth than from corruption and as a result there comes a tipping point where the rich and powerful can protect their interests better in a democratic system of government. One day we wake up and realize that we are the wealthy and powerful.

Of course this raises a big question. How do we break the cycle? Bad governance prevents a big middle class from forming, yet as long as there is no big middle class there is little pressure for a better system of government.

I believe that the answer is to put pressure directly on the ruling elites. If the ruling elites are trying to do things that maximize their wealth then it makes sense for us to make it this difficult. For instance, if a country has very high rates of corruption we should not channel any money directly to its government. Or maybe we should go further and restrict access to foreign banks for members of corrupt governments. And when a country opens up its markets we should enthusiastically trade with them so that we can help grow a bigger middle class.

Our system of government may not be perfect, but it’s pretty good. Women are educated, our police are generally helpful, and we are healthy, wealthy, and free to say what we want. It’s in our own best interest to promote it. We are facing a planetary environmental emergency and it’s going to take huge amounts of money and creativity to solve it. If we help Africans get rich and get better governments, then they will stop dumping toxic chemicals and plastic into the ocean. The whole world needs to band together. There is nothing to be gained any more from dealing with corrupt and evil elites. Let’s take the moral high ground and put some pressure on the bastards!

Sunday, August 19, 2007

The Importance of Governance

Last week I wrote about the distinction between the goals of development (health, environment, culture, and human rights) and the means for achieving those goals (economy, education, governance). Based on what I've seen in Latin America as well as what I've read, the single most important means is governance.

It is almost impossible to achieve lasting change in a country with a bad government. There are the obvious reasons: bad governments plunder the economy and steal aid. But even worse there are the subtle reasons: bad governments create a climate in which individuals are hampered from taking action that will make their lives better. In a country with a good government however, there is little else that needs to be done. The economy will boom, wealth will increase, and educated people will be rewarded for their knowledge. We need look no further than Asia to see how quickly good government policies can bring people out of poverty.

Governments go bad in two ways. They are can be corrupt, and they can be incompetent.

Corrupt governments are mainly interested in enriching themselves and they are all too common in the developing world. In the worst cases, like the Sudan, the rulers simply take aid away from the intended recipients. In Zimbabwe for example, aid agencies are forced to buy local currency at outrageously inflated exchange rates from the central bank. As a result most of the money spent on aid in Zimbabwe ends up directly in the hands of that unspeakable monster Robert Mugabe.

I think we've seen enough of human nature over the last few centuries to safely say that most governments, including those in the western democracies, will be corrupt if given the chance. In Canada the ruling Liberal Party spent years enriching their cronies with advertising contracts. In the United States the Iraq war has created incredible wealth for those with the right connections. In China, the head of the food and medicine department was recently executed for bribery. In Mexico a typical road building contract involves a large kickback to the government.

The difference between countries that are seen as very corrupt and those that are not, is the degree to which those in power are held accountable. In Canada the Liberals were investigated by the RCMP and punished in the polls. In the United States numerous senators and government officials are currently under investigation for bribery and corruption. In Guatemala, there is silence. In Africa those that fight corruption sometimes have to flee the country. Fighting corruption requires three things: a free press that can shine a light on dirty activities, a strong democracy that allows people to replace governments that get too greedy, and a court system that can investigate the worst offenders.

The second problem facing a lot of countries is government incompetence. Most people, including many of those in government, have only the slightest understanding of how economies work and wealth is created. This means that well meaning governments can often create laws that have exactly the opposite effect of what they intend. Nowhere is this more apparent than with labor laws.

Labor laws are intended to protect people from exploitation, but laws that make it difficult to fire somebody also make it risky to hire somebody. Imagine that you owned a small business and you just got a big order and want to hire an assistant. In some countries you could hire that person and keep them as long as their was work. It would be a no-brainer because if there were no more big orders you could fire them and not go bankrupt. In other countries, when you hire that person you would not be able to get rid of them without an extremely lengthy and expensive severance process. In these countries it is often easier simply not hire somebody. The ease with which you can hire and fire people is called labor-market flexibility, and it has a tremendous impact on how easily jobs are created.

The best way to create wealth is to set up an environment where people can be rewarded for hard work and cleverness. This is what got the United States so rich and this is what is lifting a billion Asians out of poverty. It may not be glamorous work, but the work of creating legal systems and training judges is even more important than building hospitals and schools. Good governments will free people to solve their own problems and will open up a world of opportunities to provide effective aid.

Friday, August 10, 2007

Evaluating Charitable Organizations: Means and Goals

Hans Rosling gave a very interesting TED talk this year about poverty. The entire talk is excellent and well worth checking out. One of his most interesting points is that to help people out of poverty it is important to separate the goals from the means. The means are the things that will actually help get people out of poverty. The goals are the reasons why they want to get out of poverty. From what I’ve seen so far, this is something many charity organizations get wrong.

Hans Rosling lists seven dimensions of development:

  • Human Rights

  • Environment

  • Governance

  • Economic Growth

  • Education

  • Health

  • Culture

Generally speaking, governance, economic growth, and education are the means by which people get out of poverty. As people get richer they will spend their own money on culture, health, and the environment, and they will find that human rights become more important to them personally.

The flipside of this is that if you don’t provide people with the means to get out of poverty, no amount of effort in the goals area is going to have much lasting impact. This is the part many organizations get wrong. For instance there are lots of organizations doing health work in the developing world, and they do some wonderful things. But in the long run many of them have very little lasting impact. At the end of the day a poor farmer who is cured of an illness is still a poor farmer. But a poor farmer who is taught to read and write might become a shopkeeper who can afford to pay for a visit to the doctor himself. If he is taught how to treat his water, he might avoid getting sick in the first place.

There is nothing wrong with supporting organizations that work on the goals end of development. Health, human rights, culture, and the environment are the things we care most about. They make life worth living, and it is in these areas that we can show our compassion and ease suffering. But I personally feel that it is important to look at goals-based organizations with a critical eye. It is easy to get so excited by easing suffering that you stop trying to prevent it.

Take environmental organizations for example. The environmental organizations that will have the biggest impact are first and foremost poverty reduction organizations, or organizations that try to improve governance. The Dian Fossey Gorilla Fund is a great example. According to their website they “provide assistance to local communities through education, health, training and economic development initiatives.” Education and economic development are the means by which they hope to get local populations wealthy enough so that they don’t need to eat Gorillas.

There are a lot of things we can do to make the world a better place. But over the years a lot of time and money has been spent of feel-good initiatives that have had little impact. We need to spend our money wisely, and make sure that the organizations we are supporting are going to have a lasting impact.

Sunday, August 5, 2007

All Hail the Mighty Cell Phone

One interesting thing about travelling in the developing world is that it makes it much clearer which products are worth paying for and which ones are expensive luxuries. There is nothing like an income of $5.00 per day to make you into a shrewd consumer. Of all the technologies that could improve the life of the poor which ones do they spend their money on first? We’ve travelled three months in Guatemala and we have the answer. Cell phones.

It seems absurd at first, but upon closer examination it makes a lot of sense. Most of us live in cities and have never known life without a telephone. It is hard for us to imagine just how different life would be if we lived in a remote mountain village in a developing country. There are no doctors, no pharmacies, and no places to buy basic supplies like farming tools or seeds. Getting something from a store involves spending an entire day on a bus travelling to the nearest town and back.

Coordinating activities also becomes much harder when there are no phones. Imagine you want to get your brother to help you fix the roof on your farm. You pretty much have to go to his house to find him. If he lives in the next village and travels a lot, this may be a time-consuming exercise in luck. Is he going to be around, or will you have to come back? People in the developing world spend a lot of time sitting around waiting for stuff. We sometimes romanticize this as a slower pace of life, but in reality it simply wasted time.

Cell phones change all that. You can call ahead to find out if the people you need to talk to are available. In an emergency you can phone your family in the city and ask them to put something onto the bus for you. If you own a car you can call people when you go into town to see if they need anything. Everything becomes a little bit easier.

In Guatemala we saw cell phones in the unlikeliest places. We saw farmers in traditional clothing standing in their fields with their wooden planting sticks talking on cell phones. We saw ladies in the markets selling weavings and talking on their phones. Our friends even had a bus who simultaneously driving, filling out paperwork, and talking a cell phone. He was driving with his knees. Almost everyone had a cell phone.

In some parts of the world cell phones have created entirely new industries. For example, in many villages there are people who rent out their phones by the minute. This is a great business simply because it increases communications. Improbably, it also improves banking. If I live in CityVille and want to send money to my friend in Farmville, cell phones allow me to do it. I simply buy a $5.00 phone card. Then I can call the person who runs the public phone in Farmville and tell her I want to give money to my friend. I then read out the phone card number. The Farmville phone operator can now put $5.00 worth of minutes on her telephone, and pay my friend the cash (minus a healthy commission). With clever uses like this it is no wonder that cell phones are one of the first things financed by many micro-credit lenders. Cell phone actually decrease poverty in dramatic ways!

Of course, if the big western companies provided cell phone services nobody would be able to afford them. In the developing world the pricing structures for cell phones are completely different than we are used to. Poor people can’t afford to pay the same ludicrous prices and surcharges that the phone company adds to my phone bill every month.

In the developing world phones themselves are extremely cheap. It costs about $15.00 to buy a phone in Guatemala, and it comes with $10.00 worth of minutes. The handsets are basic, but they work well. They have voice mail, caller ID, and call history. They come pre-activated with a phone number written on the back so you don’t need to do anything to start using one. No one year contracts and signup fees.

In another concession to poor owners, the phones are pay as you go. In Guatemala it costs around 15 cents a minute to call anywhere in the country or North America. Phone cards are available in amounts as low as 50 cents so everyone but the poorest person can afford to buy a few minutes. Lots of people buy minutes only when they need to make a phone call. Twice I borrowed a cell phone to make a call, and both times I had to buy a 50-cent phone card because the owners had no minutes.

To grow market share rapidly incoming calls are always free. This means that even if your phone is out of minutes you can still receive calls. This is very important because a telephone becomes much more useful when more people have one. If you had the only phone in the country it wouldn’t do you any good. By making incoming calls free the phone company increases the base of subscribers enormously. For instance, if you live in the city you can buy a handset for your parents in the countryside and call them at your expense.

In the developed world many people feel their cell phones as highly personal fashion statements (iPhones). Others see their cell phones as the best way of staying connected to their friends. More than once I’ve sat in a movie watching teenagers ahead of me texting their friends every 5 minutes. In the developing world, cell phones are much more significant then that. They are one of the best tools for fighting poverty. The cell phone has improved the lives of billions.