Comments and discussion.

Kremer, Michael ; O'Connell, Stephen A.

Michael Kremer: This is an interesting and indeed provocative paper, arguing for a large increase in foreign aid to Africa to help the continent escape from a poverty trap. I agree that aid should be increased, but I will take issue with a few of the building blocks in the authors' analysis and will suggest an alternative case for aid. In particular, I will argue that the limited empirical evidence seems just as consistent with conventional growth models, in which government quality and policies determine steady-state income, as with the idea that Africa is caught in a poverty trap. This should not be taken as an argument against aid, however, because there is little evidence for the "new Washington consensus" that aid cannot work in areas with weak governments and that conditionality is a failure. In fact, the case for aid may be greater where governments are doing a poor job. I will conclude by arguing that planning development expenditure around the Millennium Development Goals (MDGs) risks generating distortions.

Poverty trap models suggest that if countries can get over a certain income threshold, they will take off economically. These models therefore suggest that aid can have a powerful effect by raising countries over this threshold. The basic microeconomic case for poverty traps typically involves nonconvexities. However, even if nonconvexities exist at the microeconomic level (for example, lumpy capital investments), it is not clear that they exist at the macroeconomic level. If a certain level of transport and communications infrastructure is needed for development, for example, one could imagine a country starting out by building this level of infrastructure in a single port or capital city and then expanding outward. This might eliminate nonconvexities at the macroeconomic level.

Setting aside the theoretical issue, the question arises of how one would empirically distinguish a poverty trap model from a conventional model in which government policy determines steady-state income. In this model, countries converge to steady-state income from above or from below, depending on initial income. One can consider both microeconomic and macroeconomic approaches.

There are certainly some people in Africa with money to invest, and in some poverty trap models those people should be able to set up very prosperous enterprises, hire more and more labor, and expand their enterprises rapidly. However, we do not see that happening. In fact, many people with money in Africa move it to Europe or elsewhere rather than take advantage of the potentially huge returns available under poverty trap models to people who can reach a certain scale of investment.

At the macroeconomic level, poverty trap models suggest that African countries that attain a threshold income level should then take off. Again, this does not appear to be the case. In 1998 Gabon's GNP per capita was $3,870, but by 2002 its GNP per capita had fallen to $3,060. (1) In 1980 Nigeria's GNP per capita was almost $1,000, but in 2002 it was only $300. Many argue that governments tend to waste oil revenue, but, in a pure poverty trap model, cases such as Nigeria are difficult to explain. Nor is the problem limited to countries with oil: consider the case of Zambia, where GNP per capita was $680 in 1981 but $340 in 2002. Nor is it limited to minerals in general: Cote d'Ivoire had for a while a relatively high income per capita for Africa, but then the economy collapsed. Zimbabwe had a GDP per capita of over $1,100 in 1982, but it had fallen to $480 by 2002 and is presumably below that now. South Africa's income per capita is certainly above the level associated with poverty traps in this paper, but it has not taken off economically. (2) One relatively well off African country with good economic performance is Botswana, but with strong economic policies, democracy, and ethnic homogeneity, its experience is just as consistent with the story that good government is central as with the poverty trap story.

Under a conventional model, countries experiencing a large negative shock should grow quickly once conditions change for the better, whereas in poverty trap models they will stagnate. In fact, the fastest-growing countries in Africa in recent years have been Uganda and Mozambique, both of which suffered major shocks due to war, followed by the establishment of a government with good economic policies. (It is worth noting that aid has played a major role in each case.)

The authors argue that indicators of government quality in Africa are no worse than expected given income levels. The authors perform a service here by challenging stereotypes that many people have about Africa. For example, many seem to feel that Africa is uniquely mired in tribal violence. Yet when one compares the body count in Africa with that of Europe during the twentieth century, it is hard to make the case that Africans are more subject to ethnic strife than Europeans.

However, I do not think that one can argue from the authors' regression results that government policy is not fairly fundamental to Africa's problems. First, it is not clear that traditional measures are well suited to measuring the problems of government in Africa. For example, these measures are not designed to pick up the absence of government. Somalia does not have a central government, and even stable countries like Uganda or Kenya have areas where the government provides little security. Another issue is that respondents in corruption surveys may be giving judgments relative to expectations, and they may have low expectations for Africa.

More fundamentally, even if African countries do not have worse governments than would be expected given their income level, this does not imply that government quality does not determine income. In a model in which government quality determines income, African governments should be no worse than expected, given their income. If other factors (for example, geography) also contribute to African poverty, one would expect that African governments would look good relative to their income. Thus the authors' regression results are consistent with a model in which government quality and economic policies are the primary determinants of income, with other factors, such as the geographic factors that Sachs has discussed in previous work, also playing a role.

Although I find it quite plausible that Africa's poverty is due as much to poor economic policy and bad government as to a poverty trap, I support the paper's call for large increases in aid. I do so largely because I reject the current consensus in the development policy community that aid will only be effective if it is given to good governments and that conditionality has failed. The empirical evidence for both these propositions is weak.

Theoretically, one could imagine that aid directed at countries with "bad" governments would be much more effective. Consider, for example, a government that is neither vaccinating children nor adequately financing primary education, but rather is spending all of its resources on palaces. The fact that kids are not being vaccinated or sent to primary school implies that high-value investments are available in the country for potential donors. There are certainly incentive issues in giving large amounts of aid to bad governments, but aid need not be given to governments. Donors could provide aid to whatever institutions in the country are educating children, whether they be private schools or nonprofit organizations. Such an arrangement may well strengthen alternative power bases and even help promote reform.

It is also unclear to me why we have given up on conditionality. The classic poster child for the failures of conditionality was supposed to be Kenya. Many observers, including the Economist, have retold the story of how President Daniel arap Moi took advantage of soft-hearted or weak willed donors at the IMF and the World Bank: Moi promises to reform, donors give him money, Moi reneges on his promises; Moi later makes another set of promises, gets more money from the donors, and reneges again, in cycle after cycle.

Arguably, this story has things exactly backward. Conditionality did induce Moi to make both economic and political changes, including freeing the exchange rate, expanding scope for freedom of speech and creation of political parties, and instituting term limits. As a direct result of these changes, term limits in particular, Moi is out of office now, and Kenya is a reasonably well functioning democracy. The idea that conditionality is never effective and that governments always manipulate donors is hard to reconcile with the idea that conditionality can actually force a leader like Moi out of office. Nor is such an outcome at all unique to Kenya. There has been political reform across Africa, in large part as a reaction to pressure from donors.

At the same time, we should admit that we do not know very much about what will produce growth in Africa or when that will happen. In my view, although the case that economic policy--and, ultimately, government quality--influence income is supported by somewhat more evidence than the poverty trap view, we know very little about what does produce economic growth, and even less about how aid can play a major role in stimulating economy-wide growth.

At the microeconomic level, however, I think much more is known. The case for aid should be based not on the view that small amounts of aid delivered the right way will somehow magically deliver rapid, economywide growth, but rather on the extremely pressing human needs in the region and the fact that amounts of aid that are extremely small by developed country standards can have a huge impact on whether families have clean water, whether children get vaccinated, whether people have roads to get their products to market, and so forth.

Donors should fund interventions that work. The paper lists a number of these. In the areas where we are not sure what works, donors should try multiple approaches, rigorously evaluate them using randomized trials, and then fund those that are demonstrated to work.

I agree with the authors' point that there are plenty of useful interventions that foreign aid can support. Opponents of increasing aid often refer to capacity constraints in the recipient countries, but, in my view, these constraints are artificial and are created by the expectation that aid must be "sustainable." Many in the aid community hold the view that donors have to fund "sustainable" projects. This means that new projects and programs have to be dreamed up every few years, and that donors are reluctant to finance recurrent costs, such as teachers' salaries. Abandoning that view and admitting there are some things donors should fund for at least the next fifteen to twenty years would substantially loosen these so-called capacity constraints. It is important for children to be vaccinated, and donors should be willing to pay for that for the next twenty years; it is important for children to go to school, and donors should be willing to pay for that as well. At some point, African countries will presumably take off economically, just as many other countries have that were once considered basket cases, but it may not be for a while, and it may not be because of anything donors do.

The authors suggest that aid and development planning should focus on achieving the MDGs. (3) A potential upside of the MDGs is that they help in fundraising. But a potential downside of focusing aid and development planning on the MDGs is that it may distort how funds are spent. I fear that the upside is not materializing, and indeed the authors point out that donors have not provided the resources needed to achieve the MDGs.

Given the overwhelming importance attached to the MDGs within the world's aid agencies, I worry that the MDGs may distort development spending, particularly aid spending. Poor countries have many needs, not all of which fit neatly within the MDGs. It is not clear why aid should be given to meet the MDGs rather than other important objectives. For example, the MDGs talk about reducing poverty and seem to rely on a headcount measure of poverty. One would presumably value improvements in income almost as much for someone just above an arbitrarily drawn international poverty line as for someone just below this poverty line. The MDGs do not seem to take this into account.

To take another example, the MDGs assign no value to benefits that will occur sometime after the deadlines have passed. Why is this important? Arguably, one of the most important things that can be done to improve health in Africa is to invest in research on vaccines against diseases such as malaria and AIDS. However, developing such vaccines might take long enough that the benefits would be realized after the deadlines. If development planning is single-mindedly focused on meeting the MDGs, funds for this research might be cut.

Basing national development plans around the MDGs is a risky strategy. As the authors point out, meeting the MDGs in Africa would require a great deal of external money. If that money does not materialize, countries will be left with a laundry list of everything from building refineries to vaccinations. I worry that countries may well wind up with a half-finished refinery and without the vaccinations.

Finally, in an age when development practitioners emphasize the importance of local participation, it seems odd to establish a set of goals through a UN process, the very unanimity of which suggests a lack of local participation, and then to ask people at the local level to come up with participatory ways to implement this agenda. Needs vary from country to country.

The jury seems to be out on whether the fundraising benefits of the MDGs will outweigh the potential distortions to development planning. I would suggest a much more modest, microeconomically based approach to aid. Instead of setting macroeconomic goals, such as escaping from a poverty trap or achieving the MDGs, and then planning aid around them, it would be better to make decisions based on microeconomic evidence on the impact of particular programs and policies.

(3.) My discussion of aid and the MDGs has been shaped by conversations with Lant Pritchett of the World Bank.

Stephen A. O'Connell: It is a privilege to discuss this important essay in persuasion by Jeffrey Sachs and his coauthors. The paper makes three bold claims. The first is that modern economic growth will begin in tropical Africa only when profound geographical disadvantages have been overcome. The second is that this will require a massive, temporary public investment program that can readily be organized around the Millennium Development Goals (MDGs) as intermediate targets. The third is that external finance represents in many cases the binding constraint on implementing this program, and therefore on getting growth started in Africa.

Africa has received a lot of foreign assistance for a long time. (1) Much of the aid has been misdirected, but much has been geared to precisely the types of intervention endorsed by the authors. One should therefore ask two questions of the current paper. First, is the authors' diagnosis of "needs" significantly better than previous or competing diagnoses? Second, can a sharper take on needs, plus an overhaul of donor practices, improve the effectiveness of aid by anything like the magnitude suggested? My own view is that there is considerable scope for boldness in certain well-defined areas and particular countries. I believe nonetheless that the authors have underplayed both the uncertainties in their prescription and the constraints on an effective scaling up of aid.

The scope of the paper is extraordinary, and I will begin by quickly reviewing its contributions. Drawing on Sachs' pathbreaking research (with various coauthors) on the "human ecology" of tropical Africa, the authors document Africa's acute and in some cases widening disadvantage in agricultural productivity, transport costs, disease burden, and demographic structure. They interpret this persistent stagnation by appealing to a class of poverty trap models with geographically based increasing returns. These models provide a clear rationale for a massive, temporary infusion of external finance. To this end the authors develop a program that, at the scale proposed, amounts to a new development strategy for tropical Africa--one in which near-term efforts would focus, not on growth per se, but on establishing the preconditions for growth.

At the level of specific needs and interventions, the authors lay out an impressively concrete program. They appeal to an interdisciplinary set of literatures to identify effective interventions in agriculture, health, and education. They cost these out on a country-specific basis for Ghana, Tanzania, and Uganda. In an exercise familiar to all aid practitioners but exemplary in important respects--including its treatment of recurrent costs and the incentive effects of user fees--they calculate a financing gap. The bottom line is daunting but perhaps doable: the MDGs for income poverty, health, and education can be met in these countries through a (first sharply, then gradually) scaled-up commitment that would roughly double real aid levels for a decade. In a final section the authors lay out a program for addressing donor shortcomings that might hamper success.

Perhaps the most striking bit of persuasion in the paper is its ex post motivation of the MDGs as take-off thresholds in a big-push development strategy. It is important that this argument not obscure two features of the MDGs that have already proved critical in rallying global support for increased aid to Africa. The first is their intrinsic appeal as merit goods. Here Sachs' work on economic geography continues to be instrumental in deepening our understanding of the particular deficits faced by African populations. The second is the political genius of the MDGs, as a set of well-defined targets squarely centered on poverty reduction and human development. As the authors point out, this is an agenda that cannot easily be rejected by any party to the aid relationship. As such it may provide a framework for overcoming the conflicts of interest that have undermined this relationship in the past.

Let me now turn to the substance of the paper, starting with the development strategy it proposes. This strategy has noble (even Nobel) lineage. In 1953 future laureate W. Arthur Lewis advised the government of the Gold Coast (soon to become Ghana) as follows. "The main obstacle to development," he wrote, "is the fact that agricultural productivity per man is stagnant. Very many years will have elapsed before it becomes economical for the government to transfer any large part of its resources towards industrialization and away from the more urgent priorities of agricultural productivity and public services." (2) This is precisely the sequencing argument of the present paper. Nor is the geographical scope of the current argument much different, because in 1953 Ghana had an unambiguous head start in human development relative to most of tropical Africa. Lewis would have extended the same advice to most of the continent.

Ghana's early development plans decisively rejected Lewis's advice. Like many African leaders, Kwame Nkrumah viewed agriculture as inert and industrialization as the way forward. That view was consistent, ironically, with Lewis's famous 1954 paper, in which agriculture provides a surplus that can be leveraged into capital accumulation and growth in the industrial sector? But it ignored Lewis's deeper advice that the preconditions were not yet there in Ghana: agricultural productivity was too low to generate a surplus.

Mauritius had something closer to a Korean-style head start in the 1950s, and here Lewis's shadow fell more heavily, although not to better effect. In Mauritius future Nobel laureate James Meade dispensed advice that was vintage Lewis 1954. (4) This meant a disastrous ten-year detour into import-substituting industrialization. It was only in the late 1960s that this small island economy began to leverage its favorable preconditions (and the rents from sugar preferences) into an outward-oriented strategy based on labor-intensive textile exports. The strategy advanced here therefore resonates with what at least one deep observer of the African situation saw as early as the 1950s. Moreover, although the authors do not really answer the "what next" question, Mauritius must be the model they have in mind. This would be consistent with the 1998 Brookings Paper by Sachs and David Bloom, which notes the hostile environment for African agriculture and (gingerly) endorses a move into labor-intensive manufacturing and services. (5) Relative to Bloom and Sachs 1998, the current paper says that a platform must be built first, in the rural economy and in human development. Relative to Lewis 1953, the difference is one of urgency and scale: the platform should be constructed over the next decade, in a big push.

The contrast with Lewis 1953 highlights the central challenge this paper throws down to donors: are they being anywhere near bold enough? I think there is tremendous scope for scaling up donor activity in the broad area of science-intensive regional public goods, including basic research in health and agriculture. Here successful models are available, including the eradication of polio and the development of high-yielding seed varieties in the Green Revolution in Asia; and donors have an unambiguous comparative advantage in the direct provision or local supervision of this effort. I also believe that donors should be much bolder in providing debt relief, which is a matter of housecleaning rather than net resource transfers; here Jubilee 2000 had it right, and the Heavily Indebted Poor Countries initiative has it wrong. But where the current paper innovates is in advocating a massive and externally funded scaling up of in-country public service delivery. This is vintage capital fundamentalism, and here the challenge reverses itself. The central thrust of the literature on African development has been to dismiss capital fundamentalism as a viable interpretation of Africa's way forward: are the authors being too bold?

To answer this I will start with the gap calculation itself. Such calculations are structurally optimistic, because they are designed to spur the ambitions of donors. But their empirical failings in traditional growth-targeting applications are sobering. (6) Similar weaknesses confront a gap-financing approach to the MDGs, and particularly one of the scale proposed here. For Tanzania (the results for Ghana and Uganda are similar), the authors call for a 78 percent increase in real domestic MDG-based spending in the first year of the program, followed by a decade of further real increases at nearly 7 percent a year. (7) The initial increases in MDG spending and aid are each on the order of 10 percent of GDP. The latter is a lower bound, moreover; some big-ticket items are left out, and constant, state-of-the-art efficiency is assumed. Nor is there any genuine sense in which the program proposed here can look any different in 2016 than it does in 2015, as the authors acknowledge.

It is clear, then, that if absorptive capacity constraints are at all relevant in African countries, the scale of this program will bring them to the fore. The question is not whether the "needs" identified here are genuine; they are. But the African development literature locates ongoing needs--or capital shortages--in dysfunctional policy environments, and dysfunctional policy environments in weak institutions. The authors acknowledge this by limiting their proposal to countries in which policies and institutions are reasonably good, after controlling for income. This is an important concession to reality, but the proviso is a non sequitur. The question is not whether governance is good relative to income, but whether it is good enough in absolute terms to avoid sharply diminishing returns or even outright institutional deterioration when managing a massive scaling up of public services.

The point that "absorptive capacity matters" is my central one, and I will briefly develop it in three arenas. First, Sachs has written eloquently elsewhere about the curse of natural resources. If financial resources were the binding constraint, African countries that have enjoyed persistent commodity booms should have leveraged those into an exit from the trap. They have systematically failed to do so. One reason may be that commodity rents have tended to become a focal point for distributional struggles that have undermined policy and institutional performance. Aid may be better in this respect; unlike commodity rents, it is encumbered by donors, who pay at least some attention to the activities being financed. Paul Collier and Anke Hoeffler have shown empirically, for example, that whereas natural resource abundance tends to increase armed conflict, higher levels of aid do not. (8) But the limited and even adverse development impacts of commodity rents nonetheless pose serious questions about state capability in Africa, and about the idea that resources are the key constraint. If some form of accountability has indeed been critical in forging a constructive link between aid and conflict, the question is whether this accountability can be scaled up to support a doubling and more of public service delivery by weak government institutions.

The natural resource curse may also manifest itself via the Dutch disease, and in my own view the authors are on shaky ground in dismissing this. It is impossible for monetary policy to peg the real exchange rate over anything more than a temporary period. A large and persistent aid inflow that is geared toward domestic spending on nontraded goods and services is therefore very likely to create a serious competitiveness problem in the near term. In effect, the authors are placing another large bet on their sequencing argument: the implicit view here is that there is no point to having a competitive real exchange rate if a country lacks the human capital to go with it. This argument may be correct, but in the interim export diversification will clearly have to wait; and the empirical evidence strongly suggests that trade is more important for growth in Africa than it is elsewhere. (9)

Second, the authors assume "perfect delivery" of public services. Again the scale of the operation gives rise to concern. Improving public service delivery is currently at the frontier of public sector reform in Africa. But if institutions are currently weak, does it make sense to expand their financing and their mandate very rapidly? This might even exacerbate existing weaknesses. In a recent paper, Jean-Paul Azam, Shantayanan Devarajan, and I develop a trap model that is formally similar to the ones developed in this paper. (10) But ours is a dependency trap, in which donor activities tend to drive out the institutional learning-by-doing that is critical to improved governance. If donors ignore this link between aid and institutional development, they can trap themselves and the recipient in a high-aid, low-institutional-capacity equilibrium. The possibility is not one we are allowed to dismiss after forty years of high aid and low growth.

As a third point, there has been substantial recent progress in building greater accountability into aid design, through the use of outcomes-based assessments. But how far can such assessments take us in ensuring high productivity of public service delivery? As Lant Pritchett and Michael Woolcock point out in a recent paper, many of the MDG services are both transactions-intensive and discretionary. (11) Unlike macroeconomic reforms, the delivery of many health and education services requires the collaboration of multiple individuals who make highly discretionary choices in an environment where many key actions are unobservable. Such services cannot be delivered by a few politically protected technocrats, or even by a ministry stamping out a well-defined protocol in disparate locations. They are intrinsically subject to deep incentive problems. Consistent with this reality, the empirical link from spending on health and education to outcomes is notoriously weak--a point emphasized by the World Bank's 2004 World Development Report.(12)

The final section of the paper lays out a program to address a set of donor shortcomings--short horizons, inadequate ambition, and poor coordination--to which the authors attribute past failures in aid effectiveness. These shortcomings are serious, and the poverty reduction strategy process has begun to produce important improvements. Some donor shortcomings may be intrinsic, however, to a transaction that is ultimately a component of bilateral foreign policy. It is not clear, for example, that donors can adopt a credible ten-year horizon for aid to a high-performing African country whose current leadership might be replaced in short order by one with, well, short horizons, inadequate ambition, and poor coordination. Too many times, individual African countries or country pairs of similar geography have switched places in terms of growth performance. Examples include Uganda before and after 1986, Tanzania and Kenya in East Africa, and Cote d'Ivoire and Ghana in West Africa. Changes in the policy environment in these countries have swung growth differentials by 3 or 4 percentage points or more on a decadal basis. As we speak, landlocked Zimbabwe and Zambia are switching places in southern Africa. Aid cannot have a horizon that is longer than the uncertainties inherent in a fundamentally weak institutional environment. It may be possible to push horizons to something like five years; for programs insulated from political uncertainties (like the science-intensive regional public goods I mentioned earlier), the horizon can be much longer. But such insulation is implausible for in-country service delivery on a large scale.

Most fundamentally, improving the effectiveness of aid requires coming to grips with the deep inverse correlation of poverty with institutional capability. This will require scaling ambitions not only to need but also to absorptive capacity. A final example may convey the complexity of this issue, even within the group of countries with comparatively strong governance. Consider health interventions in Uganda and Ghana. In 1995 Ghana adopted its own structure for coordinating donors, setting up a sector-wide program in the health ministry to which donors were compelled to conform. This was precisely what Botswana had done from the outset with its own highly effective aid program--owning the process and coordinating donors around its own agenda. Ghana is now plausibly in a position to scale up aggressively in the health sector.

Uganda emerged from civil war in the mid-1980s and experienced a remarkable recovery over the next fifteen years or so. (13) This was accomplished by creating tremendous coherence at the highest levels of the budget and policy process--in the president's office, the Ministry of Planning and Finance, and the central bank. The spending ministries, in contrast, have remained a mixture of well-functioning and nonfunctioning entities, with the health ministry in the latter category. The scaling up advocated here might therefore face a Ugandan response of the following form: "We have a functioning budget process and have set our spending priorities consistent with our needs and the delivery capacity of our ministries. It is not appropriate, at this time, to move an additional 4 percent of GDP through our health ministry. Nor do we wish you to set up a competing health service delivery structure." To insist in such a context that "it can and must be done" would at best be a risky strategy for donors.

I close by saying that this is a challenging paper in the deepest and most constructive sense. I have argued for a more moderate scale of intervention, but there is much that can and must be done in precisely the areas identified here. The authors have made a concrete and powerful case for a retargeting of aid efforts in tropical Africa and a significant increase in overall assistance.

General discussion: Richard Cooper disagreed sharply with the authors' proposals for greatly expanding aid to sub-Saharan Africa at this time, unless one could ensure that the aid could be used effectively. He argued that the aid would be wasted in many countries in the region because they lacked the elementary functions of law and order that would be needed to deliver aid effectively. Cooper also questioned some of the paper' s analysis of Africa's economic plight. While granting that the region was desperately poor compared with many nations in other parts of the world, he pointed to Africa's own history as evidence that Africa is not in a subsistence-level poverty trap. Over the past fifty years, average income per capita has grown by 60 percent, longevity has increased before adjusting for the impact of AIDS, infant mortality has fallen, and population growth has been rapid. Nor was Cooper persuaded that geography makes Africa a special case: other countries, such as Switzerland, are landlocked and have even fewer resources than Africa. He observed that the British, the French, and the Portuguese had built important railroads in Africa, which had fallen into disuse through negligence and the ravages of civil war. Cooper suggested that drastic measures may be needed in some African countries, such as a twenty-first-century version of the British colonial office (for example, a UN trusteeship, with forces to backstop it), to provide minimal law and order so that economies could begin meaningful development and make use of expanded aid.

Edward Glaeser, by contrast, was convinced by the authors' arguments on the importance of geography and reasoned that, were it not for strict immigration laws in the developed countries, no one would be living in sub-Saharan Africa today. However, given the region's geography, he was skeptical about developing agriculture in the region, noting that, with transportation costs so low, only countries with comparative advantage should be in the staple crop business.

Robert Gordon found a parallel between the post-World War I reparations imposed on Germany and current plans to greatly expand aid transfers to Africa. In his classic essay "The Economic Consequences of the Peace," John Maynard Keynes argued that, through the positions they took at Versailles, Britain and France had undermined their own export industries because the reparations they demanded would force a real devaluation on Germany. Gordon worried that Africa could be similarly hurt if massive aid transfers led to a real appreciation of currencies there.

(1.) All data cited here are from WorLd Bank (2004a).

(2.) See, for example, World Bank (2004b).

(3.) My discussion of aid and the MDGs has been shaped by conversations with Lant Prichett of the World Bank.

(1.) O'Connell and Soludo (2001).

(2.) Lewis (1953, paragraph 255: reprinted in Kay, 1972, p. 88).

(3.) Lewis (1954).

(4.) Meade and others (1961).

(5.) Bloom and Sachs (1998).

(6.) Easterly (1999).

(7.) Calculated from detailed spreadsheets generously provided by the authors.

(8.) Collier and Hoeffler (2002a, 2002b). The natural resource effect is nonlinear, but the risk of conflict peaks when the ratio of natural resource exports to GDP is quite high (30 percent).

(9.) Collier and Gunning (1999); Block (2001).

(10.) Azam, Devarajan, and O'Connell (2002).

(11.) Pritchett and Woolcock (2002).

(12.) World Bank (2003d).

(13.) Reinikka and Collier (2001).

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