January 31, 2005
The Copenhagen Consensus is an attempt to set priorities among the world’s international aid goals. Its methodology is flawed, but it at least demonstrates one thing: the political process by which such goals are normally set is even more so.
The Copenhagen Consensus was sponsored among others by Bjorn Lomborg, author of “The Skeptical Environmentalist,” a 2001 book that took a cool look at the costs and benefits of actions relating to global warming. Lomborg spoke on the Consensus, which is set out in his new book “Global Crises, Global Solutions” at the Cato Institute Thursday.
Copenhagen’s purpose was to look at the possible uses of the world’s aid budgets and determine the best way of spending $50 billion over 4 years, assumed to be a moderate amount by which aid budgets could be increased or resources diverted from other uses. An expert panel selected 10 “challenges” to be examined (from an original list of 32), experts in each challenge were invited to a May 2004 conference in Copenhagen to debate the challenges and propose potential project solutions, and the projects were then ranked according to their potential economic benefits and costs.
The most interesting results were at the extremes. Of the 19 projects examined, the top 4 were control of HIV/AIDS, providing micro nutrients to the malnourished, liberalizing world trade and controlling malaria; the total cost of these four projects was under the $50 billion guideline expenditure.
The bottom four projects, all of which offered a high probability that their costs would exceed their benefits, were guest worker programs for the unskilled, an optimal carbon tax to address global warming, the Kyoto protocol on global warming and a value-at-risk carbon tax (larger than the optimal tax.)
Of the 19 projects ranked at Copenhagen, the three that appear to be being pushed most vigorously by the political classes are the HIV/AIDS initiative, the Kyoto global warming protocol, and President George W. Bush’s January 2004 proposal for a guest worker program, now being actively peddled around Congress by the administration. Two out of three from the relatively short “worst” list, in other words.
The political process thus produces distinctively worse-than-random results when it selects projects. Kyoto one could blame on the multinational, undemocratic nature of the EU (and point out that Russia’s signing up to Kyoto, in defiance of the scientific evidence, was a further pointer that Vladimir Putin’s government has lost touch with economic reality.) However, the presence on the worst list of Bush’s guest worker proposal demonstrates that political decision makers as a whole, not just in Europe, cannot be trusted to make intelligent decisions about complex economic matters. Tony Blair, calling for Africa and global warming to be regarded as the great problems for the G8 group of rich countries in 2004, on this scores 1 out of 2, and appears essentially to be firing at random! To an economic rationalist, all this is unsurprising but depressing.
If the Copenhagen Consensus process serves to focus minds on trying to spend foreign aid wisely, it will have achieved a major benefit. Devoting additional resources to the treatment of AIDS and malaria may be obvious, but it’s good to have those efforts confirmed as being economically worthwhile. Providing micro-nutrients to assist in the treatment of world malnutrition isn’t obvious at all (or at least, it wasn’t to me) and so devoting resources to a program in this area, in preference to others, would also seem a very good idea.
The Copenhagen Consensus team intends to reconvene in 2008, and re-examine the process by which they arrived at consensus, proposing new goals for the 2008-2012 period. If they do so, the Copenhagen process itself needs to be improved in two ways; the initial selection of “challenges” to be examined and the reliance on well-established but possibly faulty economic analysis to calculate costs and benefits.
To take the second point first: Copenhagen’s third “very good” project, world free trade, calculated net benefits of $2.8 trillion, most of them accruing late in the 50 year period over which they examined projects, because world free trade is believed to help the world’s economic growth rate and thus produce a “compound interest” benefit. Economic calculations of the benefits of world free trade rest squarely on the doctrine of comparative advantage, propounded by David Ricardo in 1815, by which manufacturing products in the countries where relative costs are lowest optimizes living standards for everybody.
However, technology has moved on since 1815, and many of the “products” that bring economic value today take a very different form from that envisaged by Ricardo, while global communications also embody capabilities that he could not have dreamed of. A central assumption of the Doctrine, that you can transfer to a low wage economy only that production you wish to transfer, without transferring capabilities that you wish to retain, is in many circumstances no longer valid.
In particular, outsourcing computer software and other high intellectual value added services brings the danger that the outsourcees will not be content simply to produce the services at the low rates the outsourcer sets, which bring benefits to both sides, but will seek to improve their own capability so that even the outsourcer’s “core” skills, initially lower-cost in the high wage economy, are no longer protected from low-wage competition. Whereas outsourcing textile production does not allow the low-wage textile workers to acquire the design skills that you retain domestically, outsourcing software production inevitably allows the low-wage but highly educated software writers to acquire the “software engineering” skills that you have retained and, though the Internet, to market their new capability to your customers.
Consequently, the theoretical arguments for free trade, and its beneficial effects on the world economy, are not now in all circumstances valid; if free trade equalizes world incomes to a greater extent than it increases them, the rich countries will be net losers by it. There are plenty of areas where free trade remains win-win (there remain NO economic justifications for agriculture subsidies, for example.) Nevertheless, the increasing force of protectionism in the United States and the EU is not simply a product of political atavism, but also reflects a realization that globalization has its costs as well as its benefits, and that those costs may be concentrated in the U.S., the Western European part of the EU and the wealthy economies of East Asia.
The Copenhagen Consensus process’s selection of “challenges” reflects the central weakness of a “consensus” approach – the challenges on which a consensus can agree are those on which substantial work is already being carried out, and do not include other possible challenges that are not currently prominent on the intellectual landscape. Two “challenges” that were not even included in the initial list of 32 possible focuses, and where potentially highly beneficial cost/benefit projects can be designed are the absolute level of world population (as distinct from its migratory characteristics) and the insecurity of middle class savings in most Third World countries.
A high and increasing overall level of world population has innumerable negative economic effects, in the environmental field, in the area of resources, and simply in the world economy’s potential inability to keep up with its population increase – the latter is especially a problem in the high-fertility, impoverished countries of Asia, Africa and Latin America. A program that reduced world population growth, if it could be carried out at moderate cost, would thus potentially have a very high benefit to cost ratio indeed, because its benefits would accrue in so many areas.
One possible such program, which could be tried out initially in a few target countries with especially rapid population growth and poor living standards, would be the payment of pensions to Third World inhabitants over the age of 70. Since a major cause of high reproduction rates is the need in countries without social services to provide for one’s old age by having several children who survive to productive adulthood, it follows that an old age pension system on which people could rely would have a sharp downward effect on fertility in those countries in which this was still a factor. In turn, such a downward shift would improve living standards in the countries concerned, and would bring closer the date at which world population ceases to increase and starts to decline, after which environmental and resource problems become very much more manageable.
The cost of such a program would be substantial but manageable, because of the youth-skewed age distribution in the Third World. If, for example a decision were taken to focus on the African continent, the world’s most impoverished, in 2005 of the 887 million inhabitants of that continent, only 16.9 million were 70 or older. A program to pay a pension of $60 per month (the World Bank’s subsistence definition of $2 per day) to those 70 or over in the whole of Africa would thus have an out of pocket cost of only $12.2 billion per annum, or $18.3 billion if you include 50% for administration. Any reasonable projection of the decline in fertility that such a program would produce, once people were confident it would continue, would produce annual benefits of many times that amount.
Middle class savings are important because without them, small businesses cannot be formed and economic growth is impossible. Yet in country after country in the Third World, governments loot middle class savings, either directly through expropriation or indirectly by imposing exchange controls and inflating the domestic currency. The 2001 “pesofication” of savings in Argentina, only the latest in a long series of such partial expropriations in that country, demonstrates that even in relatively prosperous countries, governments cannot be trusted to resist this easy loot.
Protecting middle class savings requires national sovereignty to be abrogated, to the extent that national governments must abandon the right to loot them. The World Bank, whose direct lending programs are of very dubious benefit, could usefully undertake in such a program – if we must have this unaccountable public sector bureaucracy, we might as well make it serve a useful economic purpose!
A World Bank backed savings guarantee program could take the form of a worldwide system of deposit insurance, which gave depositors in local banks an international guarantee, based in dollars, euros or SDRs, that their savings would retain their value and would not be expropriated. Alternatively, the World Bank could set up savings banks in each country, whose deposits it would guarantee directly; this would compel the Third World’s governments and banking systems to provide equivalent security to depositors, or see the country’s entire deposit base migrate to the World Bank’s institution. Either way, the out of pocket cost would theoretically be zero, with the country’s obligations to the World Bank under deposit guarantees ranking ahead of its other international debt, as direct World Bank debt does currently.
Such “out of the box” thinking could greatly assist the Copenhagen Consensus process to highlight economic development programs that are truly optimal. Even at present, however, the process serves as a useful check on economically illiterate politicians, encouraging them to divert aid money away from boondoggles and towards areas in which it can do most good.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.