OK, a last thought on the development initiatives and markets thread: let’s leave the predictive markets thing aside for the moment, and get to what I think is a more serious question for development initiatives – do we use all the information we might to evaluate the likely impact of our programs? I think a lot of folks misread the intent of my initial post – I was NOT suggesting we bet on mortality rates and other direct measures of project effectiveness. That is something I could see as an academic exercise, but is way too morbid for my tastes, even in that setting.
But everyone who lunged in that direction seemed to miss the point that any major development initiative will, if it succeeds, have radiating impacts through different markets. That is, a successful food security initiative will change harvest sizes of different crops, thereby influencing commodities markets. A successful public health intervention might increase the size of the workforce, or its efficiency. And so on. My simple thought was that any fund investor worth his/her salt should be examining these initiatives and their expected outcomes to decide 1) if the initiative worked, what markets might be affected, how and when and 2) do they think the initiative will actually work.
If there is no movement around these initiatives, it seems to me that these two factors might be important – at the first step in this decision-making, investors might decide that in the event of a successful intervention, the markets affected might not be accessible or profitable, or the timeframe of any movement in the market might be so long as to make immediate response unnecessary. Thus, we would see no market response to the announcement of an intervention. At that point, it doesn’t matter if the intervention will work or not – that assessment never comes into the picture.
However, in at least some cases, I have to think that there are initiatives out there (in a world of rising food prices, I am a bit fixated on food security at the moment) that would affect significant markets, and not only at a national scale (where markets might be illiquid or otherwise inaccessible). Take the case of cocoa and Cote d’Ivoire this past winter: the civil conflict in CIV cut off a significant amount of global supply, and futures markets got skittish over the further constriction of trade, driving cocoa prices upward. This is a niche crop, heavily produced by only a few countries, but the price movement could have meant big dollars for a fund that correctly anticipated this trend. Surely there are (or will be) food security initiatives that could similarly affect the overall supplies of and access to particular (perhaps niche) crops for entire regions, or even shift global availability/perception enough to shift commodities prices in much larger, more transparent markets in the short term. Don’t fixate on national markets for these initiatives – what about really big development movers that could affect global supplies of grain in an era where all the slack has been taken out of various global grain markets? You can’t tell me that everyone at these trading desks is simply ignoring the food security world . . . surely they are at least assessing through step 1) above. So if there is no market response to these initiatives, either the timeframe of movement is too distant to warrant interest, or the traders simply don’t think these initiatives will succeed enough to significantly influence the markets in which they trade. Perhaps the price of oil and its impact on transport is much, much more important than increasing harvest size when it comes to shaping food commodities prices . . . in which case, it would probably be good for those designing food security initiatives to know this at the outset and address it in project design (for example by thinking about transportation issues as integral to the initiative).
Of course, there is option 3): traders have no idea what sorts of initiatives are out there, and are operating in ignorance of these potential large drivers. This is entirely possible, but a bit hard to believe . . .
Tag: markets
Quick thought: clarifying the development initiatives and markets post
Lots of comments pouring in via twitter regarding my earlier post on development initiatives and markets. First, I found it interesting that readers went in two directions – they either took the post to be about prediction markets alone, or they caught the reference to hedge funds and realized that I was talking about “betting” in a much more general sense: that is, in the sense of hedge fund investment, which is really a set of (ideally) well-researched, carefully-hedged bets on the direction of particular stocks, commodities and sometimes whole segments of the market.
For now, let’s take up the issue of predictive markets. I love Bill Easterly’s response tweet, asking what development initiative I (or anyone else) would bet my own money on. I think prediction markets are interesting tools. They are hardly perfect, as like other markets they are subject to bubbles and manipulation, but there is some evidence to suggest that they do yield interesting information under the right conditions. It would be interesting to set up parallel prediction markets, and populate one with development professionals at agencies and NGOs, one with development academics, and one that blends the two, and then have them start to buy and sell the likelihood of success (as defined by the initiative, both in terms of outcomes and timeframe) for any number of development initiatives. While I doubt these parallel markets would move in lockstep, I wonder if they would come to radically different assessments of these initiatives. And we could examine how well they worked as predictive devices. I’m pretty sure most academics would have started shorting the Millennium Village Project at its inception (academic paper here) . . . so what things would the development blogosphere/twittersphere short today? What would you go long on (that is, what would you hold in the expectation it would meet expectations and rise in value)? Have at it in the comments . . .
I’ll address the wider meaning of “betting” that I was also aiming at later . . .
Quick Thought: Development initiatives and markets
Welcome to a new feature of Open the Echo Chamber, a quick post on something that interests me. Yes, I am capable of writing less than 1000 words in a post, but most of the time I take on subjects that need a lot of attention. Going forward, I am going to try to intersperse some “quick thoughts” on the blog for those who lack the 15 minutes and headspace to deal with my longer fare . . .
I’ve been doing a lot of reading about hedge funds lately, and it recently hit me: does anyone in the markets bet for or against development initiatives? It seems to me that you could – after all, a big initiative from either a multilateral or large bilateral donor will often come with quite a bit of money attached (at least initially), a lot of publicity, and some clearly stated goals that are almost always tied to economic growth or diversification. So, do investors look at these initiatives and bet for or against them? I’m not saying they bet directly on an initiative, but on its outcome: for example, do funds look at large food security initiatives in a particular country and bet on the prices of the crops involved in that initiative?
Here is why I care: if nobody is betting on them, it pretty much signals that these initiatives are largely irrelevant. Either they are not large enough to move any market in the short or long term, or they are not aimed at anything likely to induce a transformation of economy and society through some set of cascading impacts in the long term. If this is the case, it seems to me we ought to back out of those initiatives right away. This is not to say that we should not be addressing the needs of the most vulnerable people in the world, but to suggest that an absence of interest in these initiatives might mean that our efforts to address these needs are not likely to come to much.
On the other hand, if we see significant betting on the outcomes of initiatives, it seems to me we might start to look at the direction of this betting (short or long) to get a sense of how things are likely to play out, and start looking for problems/leveraging opportunities as soon as possible.
Just a quick thought . . .
The British lead . . . and who will follow?
David Cameron gave a speech yesterday at the Global Alliance for Vaccines and Immunisation conference. It deserves to be read in full – I don’t agree with every word (and how I disagree with many of Cameron’s stances), but it is one of the clearest statements on why we must continue to deliver aid to the poorest and most vulnerable people in the world.
On the down side, Cameron starts out a bit too market triumphalist for my tastes:
At home we don’t tackle poverty by state hand-outs; we help people get into work, to stand on their own two feet and to take control of their own destiny. The same should be true of development. No country has ever pulled itself out of poverty through aid alone, so this government will take a new approach. The same conditions create prosperity the world over. They include access to markets, property rights, private-sector investment and they make up what I see as the golden thread of successful development. Ultimately it’s the private sector that will be the engine for growth and that’s why this government’s efforts will increasingly focus on helping developing countries achieve that growth with the jobs and opportunities it will bring.
Well, this is a bit muddled. First, last I checked England (and Great Britain more generally) was home to a robust welfare state (well, until various Tory governments from Thatcher to Cameron took a hatchet to it) that provided the safety net that enhanced the quality of life of its citizens. On the other hand (and second), I agree that no country has ever been lifted out of poverty through aid alone – but then, that’s not what aid does. At best, aid catalyzes much larger processes of change – and sometimes those changes play out constructively (I discuss this at length in Delivering Development). Third, the only countries to have really changed their status in the last half century have done so by rejecting things like the open market and behaving in very politically repressive ways to get through a serious of difficult transitions that eventually made them competitive in global markets and able to productively take in foreign investment – so this claim about what works isn’t fully supported by the evidence. Andy Sumner’s work on the New Bottom Billion suggests that this might be changing as a new pile of countries “graduate” from low-income to middle-income status, but this is still unclear as many of the new “graduates” from low to middle income status have just crept above that line, often with no transformation of their economic fundamentals (leaving them vulnerable to slip-back) and still containing huge numbers of very poor people (creating the same problem, and calling into question the very concept of “graduation” to middle income status).
This is not to say that I don’t think markets have any value – I just fear those who place absolute faith in them, especially given that the environment is the site of perhaps the most serious market failure we’ve ever seen. However, as the speech progressed, I became somewhat more comfortable as, at least in the context of development, Cameron takes a somewhat more moderate tack:
We want people in Africa to climb the ladder of prosperity but of course when the bottom rungs of that ladder are broken by disease and preventable death on a massive scale, when countries can’t even get on the bottom rung of the growth ladder because one in seven of their children die before they reach their fifth birthday, we have to take urgent action. We have to save lives and then we can help people to live. So that’s where today’s announcement fits in. Because there cannot really be any effective development – economic or political – while there are still millions of people dying unnecessarily.
Absolutely correct – the “bottom of the pyramid”, as it were, often finds itself left behind when economic growth programs rev up . . . this is well-understood in both academia and the development institutions. Indeed, it is not controversial for my Bureau (DCHA – the folks who deal with disasters and conflict) to argue that its work is fundamental to creating a firm foundation for future development efforts because we address the needs of vulnerable populations who might otherwise be overlooked by Agency programming.
But what I most like is the kicking Cameron hands out to those who argue we don’t have the money for aid in these hard economic times. The kicking comes in two parts – first a moral argument:
When you make a promise to the poorest people in the world you should keep it. I remember where I was during the Gleneagles Summit and the Live 8 concert of 2005 and I remember thinking at the time how right it was that those world leaders should make such pledges so publicly. For me it’s a question of values; this is about saving lives. It was the right thing to promise; it was the right thing for Britain to do and it is the right thing for this government to honour that commitment.
So to those who point to other countries that are breaking their promises and say that makes it okay for us to do the same, I say no, it’s not okay. Our job is to hold those other countries to account, not to use them as an excuse to turn our back on people who are trusting us to help them. And to those who say fine but we should put off seeing through those promises to another day because right now we can’t afford to help, I say we can’t afford to wait. How many minutes do we wait? Three children die every minute from pneumonia alone; waiting is not the right thing to do and I don’t think that 0.7% of our gross national income is too high a price to pay for saving lives.
…
I actually think that most people in our country want Britain to stand for something in the world, to be something in the world. And when I think about what makes me proud of our country, yes, I think of our incredibly brave service men and women that I have the honour to meet and see so often; and yes, I think of our capabilities as an economic and diplomatic power; but I also think of our sense of duty to help others. That says something about this country and I think it’s something we can be proud of.
Where . . . the . . . hell . . . is . . . the . . . American . . . political . . . leadership . . . on . . . this? Dammit, the British just took the “City on a Hill” mantle from us. Most Americans want America to stand for something in the world, last I checked.
Oh, and Cameron addresses the unaddressable (for America, it seems) in his speech: that development, in reducing the need for future wars and humanitarian interventions, actually is cost-effective:
If we really care about Britain’s national interest, about jobs, about growth, about security, we shouldn’t break off our links with the countries that can hold some of the keys to that future. If we invest in Africa, if we open trade corridors, if we remove obstacles to growth, it’s not just Africa that will grow but us too. And if we invest in countries before they get broken we might not end up spending so much on dealing with the problems, whether that’s immigration or threats to our national security.
Take Afghanistan. If we’d put a fraction of our current military spending on Afghanistan into helping Afghanistan 15 or 20 years ago just think what we might have been able to avoid over the last decade. Or take Pakistan. Let another generation of Pakistanis enter adult life without any real opportunities and what are the risks in terms of mass migration, radicalisation, even terrorism? That’s why UK support over the next four years will get four million more children in Pakistan into school. This could be life changing for those children and it can be part of the antidote to the extremism that threatens us all. So it’s not just morally right to invest in aid, it’s actually in our own interests too.
God help us, Ron Paul seems to be the only candidate for anything willing to say that the wars we are in are costing a hell of a lot of money, and might not have been necessary. Of course, Ron Paul doesn’t like aid, either . . . actually, he doesn’t seem to like much of anything. Nobody is really taking his hobgoblin act all that seriously, which means he isn’t going to shift the debate here. Cameron, though, really glues his fiscal conservativism to a rational argument for aid – maybe we just should have worked on the aid side of things, at a fraction of the cost, and averted the whole mess in the first place. Lord help me, the Tories are sounding reasonable . . .
Now, Cameron’s ideas for transforming aid are vague, mostly about focusing on results and enhancing accountability. This is all well and good, but amazingly thorny. There’s been quite a bit of discussion about evaluation in the development community (great summary list here) and this blog (here, here and here) of late, and if nothing else, the reader might come to grips with the huge challenges that we must address before we can get to a realization of Cameron’s otherwise nonoffensive ideas.
I suppose it was asking too much to hope a leader talking about transforming development might mention that the global poor might actually have ideas of their own that we should start learning about before we go barging in . . .
Apparently the cocoa markets aren't that worried about one third of their supply . . .
Hmm, the last month of cocoa pricing, via the International Cocoa Organization
Prices are only up 7%? Despite everything going on in Cote d’Ivoire? I can only assume there is a massive oversupply out there cushioning this market . . .
Shouldn't accounting rules apply to everyone?
Hoorah! The World Bank is officially recognizing that environmental impacts are an example of a colossal market failure, and moving aggressively to get the cost of these impacts built into country’s national accounts. To quote World Bank President Robert Zoellick:
“We know that human well-being depends on ecosystems and biodiversity,” said Mr Zoellick.
“We also know they’re degrading at an alarming rate.
“One of the causes is our failure to properly value ecosystems and all they do for us – and the solution therefore lies in taking full account of our ecosystem services when countries make policies.”
Well, super. We’ll see how this goes over when a bunch of countries see the accounts they use for planning head into the toilet – my guess is massive pushback from countries that can (China, India, pretty much the entire Global North), which means the only countries that will be forced to deal with this revaluation are those in the Global South too small to resist World Bank pressure. Enforcing this change in accounting unevenly will be remarkably unfair, if this is how it plays out. Think I’m a bit alarmist? Continue reading the article, right down at the end:
The draft agreement ministers are considering in the main negotiations here calls for “the values of biodiversity” to be integrated into countries’ development and poverty reduction strategies.
But delegates are still arguing over whether to call for integration into national accounts.
Only developing countries have to create poverty reduction strategies and development strategies. So if these values are used in these strategies, but not in national accounts more widely, we are going to be hitting the poorest countries pretty hard while doing nothing ourselves.
However, there is a larger problem here – the valuing of everything via markets. While this is an interesting effort, neither the science nor the economics are very well worked out, so the value of many ecosystem services (the goods and processes we get from ecosystems) is hard to calculate. So, will we end up only dealing with this in ecosystems where the economics and science is further along (forests, for example – and temperate forests, at that)? Or will we risk arbitrary valuations that lead to their own kinds of market failures? The first option runs into the uneven enforcement problem I raised above – not every country has well-understood forests, so only some countries would have to deal with this revaluation. The second is not an improvement on the current situation – indeed, it would give us the false impression we know what we are doing, when we do not.
Watch this space . . .