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Friday, May 27, 2005

Is debt relief aid?

UK charity Action Aid has been getting quite a bit of press today with its report that only one-third of G7 overseas development assistance (ODA) is "real" aid. The rest, they say, is "phantom aid". (If you're interested, the full report is here, in PDF format.)

The thing that struck me about the report was where Action Aid said that debt relief counts as "phantom aid". I think that debt relief is hugely important for poverty reduction, and so I was rather angry abou that, especially since Action Aid defines "phantom aid" as "aid which may have achieved other goals, but did not help to fight poverty".

There are many, many things to take issue with in the Action Aid report – for instance, since only 30% of the world's poor live in middle-income countries, Action Aid counts any aid to those countries beyond 30% of the total budget as "phantom aid". This is profoundly silly: poverty-reduction programs are, if anything, more effective in middle-income countries, because those countries have better institutions.

But let's stick with debt relief. Consider a highly-indebted country with a poverty problem. It needs to spend money on providing clean water to its poor, but it also needs to spend money on debt service. In this situation, by far the most efficient way for a foreign government to get clean water to the people who need it is to simply forgive that country's debts. All the transaction costs of the foreign government trying to provide the water itself – from consultants to bureaucratic procurement procedures – disappear at a stroke. The local government, which is certainly better placed to provide water than the foreign government is, gets budget money freed up to be spent where it's needed.

The local government can also, with its newfound creditworthiness, start to finance projects which are needed for the long-term health and growth of the nation, like building roads or ports. What's more, it can quite easily reallocate money where it's needed when it's needed, something a foreign government would find almost impossible.

Now, debt relief on its own does not necessarily decrease poverty. If the money saved in debt service is spent instead on private jets for the president and kickbacks to his buddies, then the debt forgiveness will have done no good at all. That's one reason why the HIPC program was so slow to get off the ground: it took a long time for governments to prove that they were worthy of it. But when it's done right, debt relief is pretty much the most efficient way of delivering aid imaginable. Just think of the costs involved with the average World Bank poverty reduction program, complete with environmental impact assessments and whatnot, compared to the cost of a local government simply going out and doing what is needed for its poorest citizens. So I'm pretty upset that Action Aid simply declares that no debt relief helps to fight poverty.

Then, however, I read the Action Aid report, and it does make some good points. Here's what it says:

All debt relief provided since 2002 has been counted as part of ODA, despite the fact that the Monterrey Consensus agreed that year explicitly stated that aid increases should be additional to debt relief.

Irrelevant. While the Monterrey Consensus never said that debt relief should be excluded from ODA budgets, it did set a target for ODA which explicitly excluded debt relief. To no one's great surprise, many countries are a very long way from reaching that target, even when you include debt relief. But debt relief is a type of aid, and it is therefore perfectly reasonable to consider it ODA. If Action Aid wants to castigate countries for not meeting their Monterrey Consensus goals, that's fine. But it does not mean that debt relief is "phantom aid".

Cancelled debt stock – the principal and interest on the loan – are counted as ODA in the year in which the relief is agreed, even though any benefits are felt over several years.

Arguable. On its face, this is quite a strong argument. Let's say that Freedonia is paying $5 million a year on $100 million of debt, and that Belgium then decides to forgive that debt. Suddenly, Belgium's ODA expenditure for that year has gone up by more than $100 million, while the amount of cashflow freed up for poverty reduction is a mere $5 million. Clearly, Freedonia would have been better off simply taking the $100 million from Belgium, using $5 million of it to service the debt, and spending the rest on poverty reduction.
On the other hand, there are two reasons why debt relief is accounted for this way. The main one is that this is simply the way that budgets in the OECD work. Loans are assets, and accounted for as such. When a loan is written off, that's a line item in the country's budget, and the full amount of money needs to be found for it immediately.
Furthermore, Freedonia gets more than just a cashflow benefit from the write-off: it also gets a significant decrease in its indebtedness. Without a write-off, Freedonia will simply continue to pay interest on its loans and never pay down the principal. With the write-off, Freedonia's debt burden falls substantially, making the country's economy more stable and attractive to investors.

These figures exaggerate the actual transfer being made to poor countries because debt relief is valued at its full nominal value. Much of the debt relief provided to poor countries simply closes the gap between what countries were scheduled to repay and what they actually were able to repay, and has often done little to relieve budgetary pressure on poor countries.

Fair. If Belgium had already agreed that Freedonia need only pay $1 million a year on its debt, then claiming over $100 million in ODA upon forgiveness seems even more exaggerated. Freedonia gets ony $1 million a year in immediate cashflow benefits, while Belgium gets to crow about its enormous ODA budget. There's no way that Belgium's action can be spun as meaning $100 million's worth of poverty reduction.
What's more, Action Aid shows that total debt service costs, especially in HIPC countries, have actually been rising, rather than falling, even as large chunks of their debt have been forgiven. It's good that the debt has been forgiven, of course. But without cashflow benefits, it's not clear that there's been much poverty reduction as a result. And it certainly seems unlikely that even a small fraction of the $9.4 billion cancelled in 2003 made its way to direct poverty-reduction programs.

In the UK, debt cancellation has been presented as additional to aid spending. This is double counting.

Unfair.The UK, as far as I know, has been quite upfront about its debt relief activities and their place within the ODA budget. No one's counted debt relief on its own and then added it to an ODA total which already includes it. Therefore, no double counting. The Action Aid methodology says that all debt relief is "phantom aid", not just debt relief which is double-counted.

Funding debt relief from aid budgets is not only misleading. It also risks penalising countries that are not indebted, as aid resources are diverted towards heavily indebted countries. It also violates the principle that creditors should carry some of the cost of debt relief, given the role that reckless lending has played in the debt crisis, and the fact that much of the initial lending was not supporting development-related expenditures.

Arguable. While it might be fair to include debt relief within an ODA budget, it's not fair to fund debt relief with an ODA budget – and I daresay more than one country has been doing that of late. In other words, certain countries might have spent money directly on poverty reduction which they allocated instead to debt relief. That's a bad thing. The big question is the extent to which that behaviour goes on, and since it's all based on a hypothetical – "how big would your ODA budget have been had you not done the debt relief?" – it's very difficult to answer.
Poor countries without debt have not necessarily been penalised – that's a strong word – but it's true they haven't had the same amount of attention paid to them that the HIPC countries have had.
As for the "principle that creditors should carry some of the cost of debt relief", aren't the creditors carrying all of the cost of debt relief? If they're not, who is? I think I understand what Action Aid is trying to say here, but it's a very weak argument indeed.

Weirdly, after running through its arguments, Action Aid concedes my main point:

Debt relief can be a particularly effective form of resource transfer, as it is untied, stable, predictable and flexible.

Well, exactly! The only argument seems to be whether it belongs in ODA budgets – and if it does turn up there, whether it is "phantom aid". My view is that any effective, stable, predictable and flexible form of resource transfer is most definitely foreign aid, and not phantom aid.

I think the biggest problem with the Action Aid report is that there's an unspoken assumption running throughout it that we generally think that the amount of poverty reduction is proportional to the amount of money that is spent on poverty reduction. Action Aid gets halfway to the truth of the matter: that some parts of the broad global poverty reduction program are much less cost-effective than others. But the charity also confuses the matter by trying to draw a bright clear line between "real aid" and "phantom aid".

In fact, all aid is useful to some degree, and there is no such bright clear line. Countries spend money on ODA for many reasons, and some of that money is always going to be more cost-effective, in terms of poverty reduction, than other chunks of that money. The problem is that Action Aid spends a large amount of space in the report comparing the amount actually spent on aid to the amount that it thinks should be spent on aid. It's confusing means (money) with ends (poverty reduction).

In fact, there's no formula tying a certain number of billions of dollars to a certain number of lives brought out of poverty. Action Aid shouldn't be concentrating on dollars, it should be concentrating on people. Scaring up a "scandal" (cf the Guardian headline) over "phantom aid" doesn't achieve that in the slightest – if anything it reduces pressure on governments to spend more and do more. After all, if two-thirds of the money is wasted, what's the point of spending the money at all?

Posted by Felix at 15:18 EST | Comments (0)

Tuesday, May 24, 2005

Lessig vs Butler

Yesterday, I was unhappy, because my computer had to make a trip to the emergency room. Today, I am happy, because it is back and shiny and happy and has a Tiger in the tank. With any luck, this development will increase my blogging frequency: twice, of late, I've written long and fabulous blogs only to have them eaten by a badly-timed computer crash. One was on women artists, and the other was a letter of response to a question posted by Larry Lessig.

Lessig knows a lot about many things, but I thought his question betrayed a rather surprising naiveté about journalism. What happens when someone complains about an article? Lessig seems to think that the journalist is quite likely to bear a grudge against the complainer, and maybe even take out that grudge with an even more unfair article in the future. Whereas most journalists consider complaints to be evidence that they're doing their jobs right: if you're not pissing anybody off, you're not much of a journalist.

Anyway, the other shoe has now dropped, and we now know who the journalist in question was and what she was writing about. It's Susan Butler, of Billboard magazine, writing about Creative Commons and its relationship to the music industry. Her original error, described by Lessig as "factually and fundamentally wrong", was to say that the organisation "urges creators to give up their copyright protection by selling their copyrights to the commons for $1". In fact, although there once was a plan do do something along those lines, no one ever followed through on it.

After Butler's original article came out, Lessig asked for a correction, never got one, and then learned that she was writing an in-depth article about Creative Commons. Her follow-up article finally appeared on Friday.

Lessig's original blog said that commissioning Butler to write such an article was at worst unethical and at best bad business from Billboard's point of view, since "if the report is generous, it seems a way to make up; if the report is critical, it seems grudge journalism". Remember, here, that Lessig's original complaint was about two sentences in an article which even he admits mentioned Creative Commons only in passing. Whether or not you rate Butler's journalism, it seems unlikely that that his complaint would have driven her to be particularly mean about him in future.

Now, we can all read Butler's article. "Music biz wary of copyright sharing movement" is the headline, which is undoubtedly accurate: Butler spends a lot of time detailing the misgivings that various music-biz bigwigs have about Creative Commons in general and Lawrence Lessig in particular.

In the end, Lessig is probably justified in feeling hard done by. Butler, it seems, made little if any attempt to get to the bottom of the two sides' arguments: instead, she uncritically reproduces quotes from both Lessig and his opponents. So when the music industry complains about "a point of view that would take away people's choices about what to do with their own property", she doesn't point out how ridiculous that is. In fact, what Creative Commons is doing is quite the opposite: it's giving people a wide range of choices about what to do with their own property.

The article also ends with a completely ridiculous anecdote about Andy Fraser, who has paid for AIDS treatment with song royalties. "Had he given up his rights to those early hits," writes Butler, "he would not have the resources to cover his treatment for AIDS."

What Butler knows full well is that the vast majority of Creative Commons licenses are for non-commercial use. If Butler had attached a Creative Commons license to his songs, it could easily have made no difference whatsoever to his royalties. Of course, if he had allowed commercial use of his songs without any payment to himself, he'd be worse off today. His quote is the final sentence of the article: "No one should let artists give up their rights".

This is sloppy journalism. It is simply a fact that artists, if they're so inclined, can give up their rights. Some want to do so; most don't. But no one, to my knowledge, is seriously advocating any kind of legislation which would prevent artists from doing this should they be so inclined. It's unclear whether that's what Fraser is asking for. But it's also unclear what relevance his quotation has to the argument at hand.

There are certainly powerful elements within the music industry who feel threatened by Creative Commons: this is understandable, since CC is threatening the music industry's effective monopoly on music copyrights. Butler, on the other hand, gives the final word in her article on the subject to someone who provides little more than human interest. If he belongs anywhere in the article, it's at the beginning, not at the end.

All that said, however, I think that Lessig is complaining a little bit too much about this article. We all know that the music industry and other multinational media conglomerates have done an extremely good job at framing the debate on copyright. And the article is not completely one-sided. Here's the lede:

An innovative approach to sharing and licensing copyrighted material is spreading around the globe, gathering millions of creative works under its umbrella.

And here's the quote count: Two from David Israelite, anti-CC. One from Tim O'Reilly, pro-CC. Two from Hal Abelson, pro-CC. One from Hilary Rosen, anti-CC but with the caveat that she "supports the Creative Commons approach to licensing". One from Cary Sherman, pro-CC. One from Larry Lessig, pro-CC. One from Andy Fraser, anti-CC. And this one from Michael Sukin: "Lessig and his followers advocate a shorter copyright term". Which comes from an anti-CC person, but is basically just descriptive and true.

Net-net, we have four people who might be construed as being anti-CC, and four people who are unambiguously in favour. There are four anti-CC quotes, five pro-CC quotes, and one quote which is really neither one nor the other. Furthermore, the quotes from the pro-CC crowd do not make them look silly, and were not taken out of context.

Frankly, I see no evidence at all that Butler is bearing a grudge against Lessig for complaining about her earlier article. Rather, I think she's talking to music-industry professionals for an article in a music-industry publication, on a subject which is of no little concern to the music industry. It's only natural that a certain amount of pro-music-industry bias will creep in to such an article. Lessig shouldn't be getting his knickers in a twist about an article like this: his time is precious, and this just isn't worth it.

Posted by Felix at 17:21 EST | Comments (0)

Monday, May 09, 2005

Make Dia free!

Dia: Chelsea is relocating to become Dia: Meatpacking, anchoring the southern end of the High Line redevelopment. The New York Times quotes Michael Govan, Dia's director:

Plans call for building a simple two-story museum with 45,000 square feet of gallery space on two floors... The main galleries would extend over part of the Gansevoort Meat Market, contiguous with and at the same level as the High Line.
"You will be able to enter the main level of the museum from the High Line," Mr. Govan said...
So far, Mr. Govan said, about half of the necessary money has been committed, contingent on the project's approval. He estimated that the new museum would cost about $35 million to build and that Dia would need $20 million for an endowment to run it.

We're also told that Dia had grown out of its Chelsea location, due to the high number of visitors it was attracting: 60,000 a year.

The City of New York owns the lot that Dia is moving to, and supports the plan to put a private museum at the entrance to a new public park. But given that the city is providing the land for the museum, I think it's only fair that they should ask for something in exchange – to wit, that Dia should be completely free to the general public, like the Tate in London.

Admission at Dia: Chelsea, as I recall, was $6. If all of the 60,000 visitors paid $6 to get in – which many of them didn't – Dia was grossing $360,000 a year in admissions revenues. The all-in cost of collecting those revenues – having a couple of people sitting at the front desk full-time, managing the cash, etc etc – probably brought the net revenues down to maybe a couple of hundred thousand a year. If Dia wants a $20 million endowment to run Dia: Meatpacking, I reckon it should be able to find a few hundred thousand per year to replace whatever amount of money it might intend to make on admissions.

If there was a real will to make Dia: Meatpacking an integral part of the Highline experience, as opposed to a museum leveraging the foot traffic that the Highline will generate, I'm sure it could make itself free without too much difficulty. The two could work wonderfully together: Dia could drive traffic up the Highline, possibly towards destination galleries in Chelsea, while the Highline would help deliver and introduce a whole new public to hard-edged contemporary art.

But I suspect that it's not going to happen, and that the main reason it's not going to happen is entirely due to snobbishness. Dia likes being in out-of-the-way places. It moved to Chelsea when there was relatively little going on there; the De Maria pieces in Soho are hard to find and were even more so when they were built; and Beacon, of course, is a long schlep up the Hudson from Manhattan. And all of those are positively easy to get to when compared to De Maria's Lightning Field. The end result is a series of quiet and solemn places which exist to serve the art above all – certainly above the public.

Dia has never advertised. When Dia: Beacon opened, Govan told me that he really didn't care whether 50,000 people or 200,000 people would visit per year. The foundation serves the art, and if people want to see the art that's fine; if they don't, that's fine too. It's just not in Dia's DNA for the gallery to open up its spaces to the general public, with its iPods and rollerblades and chewing gum and utter obliviousness to the subtleties of Robert Irwin installations.

But it's entirely Dia's choice to move to the trendiest neighborhood in Manhattan, right on the rapidly-developing waterfront, to a lot which seems designed to maximise the amount of foot traffic that will walk past it. Dia clearly wants a higher public profile, which will inevitably mean much more interaction with the general public than it has had in the past. It should take this opportunity to embrace that public, and bring its art to the masses.

Posted by Felix at 12:06 EST | Comments (4)

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