Monday, February 28, 2011

International Aid: Skip the Middle, Skimming, Man?

Slate had an article this past Friday on the international aid/development community: Is it better to give money directly to the poor people of the Third World, or give to their governments, who in turn distribute to the people.  This article coincides with the current discussion over Mubarak's and Qaddafi's personal fortunes skimmed from their countries.  Many government employees in the Third World are corrupt.  Development groups and advocates have long recognized the inefficiency of corruption.

There have been previous attempts to impose accountability on Third World bureaucracies.  American governmental aid generally comes with auditors, monitors, and reams of forms to fill out, in part to minimize foreign corruption.  The structural adjustment programs of IMF and World Bank were a response to the bloated and corrupt bureaucracies: With the ministries and state enterprises being a source of patronage and a job program for the ruling parties, it was no surprise that these countries would have to default.  To get new loans and aid, then, these countries must pare back their government, enact "austerity measures", to get back to an affordable level.

We can see that the Structural Adjustment was a proximate cause of the current troubles in Egypt: World Bank and IMF forced Egypt to limit government size and to divest state enterprises.  Therefore young men could not get a cushy government job like their parents.  Therefore they can't marry and they got angry.  QED revolution.  Although the fundamental question naturally arises: How did their parents get all those iron rice bowl government jobs?

In any event, Mubarak and his people had it coming to themselves.  Knowing that structural adjustment was coming, they could have prepared their people for a private-sector economy.  The redtape against starting a business in Egypt is legendary, sometimes exceeding the already bloated obstacles in India.  That could have been a starting point for Mubarak, coincident with the privatization.

In any event, the move to cut out the middle man/government in dispensing aid is an alluring proposition.  If you just give poor people money directly, they can spend it well.  We're in the post-Westphalian age, anyway.  But the authors went ahead and cited two native government programs, where the government, that skimming government, was monitoring the poor for compliance with program conditions.  So you end up having to depend on a bureaucracy, either government or private, for ensuring compliance [such as sending kids to school and receiving vaccinations.]

To go around the government corruption problem, aid organizations and donors will essentially have to create their own private bureaucracy to execute the program on the ground.  Then, if corruption is an intractable cultural problem, this private bureaucracy will become corrupt over time, less and less effective.  And that's assuming your conniving government was willing to stand aside and forgo its loot.  Cutting out the government works only when the government has ceased to exist.

In addition, Western donors and aid organizations run into the command economy problem: they just do not have enough information at their level to make effective spending decisions on a long term basis.

The real answer, as many conservatives concluded in the '80s, was to cut the dole.  Most of the Third World governmental dysfunction come from our misguided welfare program.  Western food subsidies drive African maize and yam farmers out of business.  Western aid creates a large bureaucracy more focused on life in the cities than the poor in the countryside.  College grads make more money being the drivers of aid workers than being an engineer.  Only by stopping the money can we hope to starve the distorted incentive structure we have created. 

Wednesday, February 9, 2011

Book Review: John Reed's Hyperinflation

I wrote this awhile ago.  I just started a new job, hence the lack of activities recently.  Anyway, here it is.

When I found out that John T Reed was writing a book on Hyperinflation and Deflation, I was really excited.  His book, Succeeding, was a true self-help book that focuses on working hard, saving money, and doing the right things.  He writes clearly, with a minimum of flowery language, and includes checklists and other tools to help readers implement his advice.  His preview articles on this subject promised unconventional advice on coping with currency fluctuations.

I pre-ordered 2 copies, and they arrived right after the release date.  The book starts off with a review of the current state, a history of hyperinflation and deflation, and then Reed's financial countermeasures.  The book is clear and well-written, with Reed's characteristically critical tone.  It is an engaging read.

If you have read Laurence Kotlikoff's The Coming Generational Storm: What You Need to Know about America's Economic Future, then you are familiar with the scale of the US financial liabilities. [IE, The US owes more in current and future obligations (Medicare/Social Security) than it will ever have the money to pay off.]  In fact, Reed cites Generational Storm as a major source in the book.  However, if anything, Kotlikoff understates the problem, if that was possible, as Reed made abundantly clear.  The only saving grace for the US is that the rest of the world is worse off than the US.  Conversely, the US's critical economic position means America will amplify the economic crisis and spread it to the rest of the world.  Regardless, the 'flations are coming soon, and all investors need to hedge the 'flations.

Reed's financial countermeasures are definitely unconventional.  He explained in great detail his reasonings, and cited multiple sources to back it up.  His chapter on precious metals goes against most writings on the subject [of both pro & con], but will help you avoid trouble with future legislation and law enforcement.  The current brouhaha over the 1099-Misc. $600 requirement (Obamacare) is just a portent of the negatives of a PM-only strategy.  Reed is not avoiding PMs altogether, but is serving as a corrective against the lazy-thinking behind a PM-only strategy.  In a 'flationary environment, governments inevitably restrict usage of precious metals instead of currency.  Therefore, the prudent investor has to rely on other countermeasures to adequately hedge against the 'flations.

Every prudent investor needs a copy of John Reed's Hyperinflation & Deflation.  His book is still timely and will help you survive the 'flations.
I wrote that 4 months ago (Sep'2010).  Since then, the economy has improved slightly, making 'flationary concerns less pressing to most of you.  However, the fundamentals has not changed.  The US Dollar is still unsound.  As Reed recently commented, the current debt ceiling debate in Congress is a good opportunity to fix our problems, but that Congress will sadly squander.  With the improving stock market, it is a good time for many investors to diversify their recovered portfolio into the other assets Reed recommends.  Now is the time.  Like the Chinese saying, "Short pain is better than long pain."

For all readers, Fernando Aguirre's The Modern Survival Manual: Surviving the Economic Collapse is a good complement to Reed's Hyperinflation.  Aguirre provides a good ground-level view of an economic collapse, and gives you a good understanding of the interplay of recession, hyperinflation, and deflation.  Aguirre offers other good tips on preparing for a 'flationary future.  His blogs are good to keep up with.

For readers interested in the academic background on the American debt obligations, Generational Storm, though dated (2005), still offers a good backgrounder.  It explains the math, too.  Kotlikoff's recent works could be good reading, too.