3 min read

Suppose you’re a donor interested in helping people in the Third World improve their lives. Suppose you had a model which precisely predicted which businesses would succeed in a country at a particular stage of development and which ones would fail. Would that model affect how you give?

The notion that economic development can be precisely predicted would cause most of us to go to our bookshelves and start thumbing through the works of F. A. Hayek. But that’s the claim made by Harvard economist Ricardo Hausmann, a former Venezuelan minister of planning, in this provocative op-ed.

Now, normally I would treat ideas by former Venezuelan ministers of planning with as much respect as I would those of recent “critical identity” majors (who, 20 years ago, were women’s studies majors). But we now have the rise of “predictive markets,” the discipline that programs giant computers at Pandora or Netflix to tell you what songs or movies you would like. I read somewhere that Amazon has started sending frequent customers products on approval, confident that the customers will be so satisfied with the unsolicited goodies that they’ll happily pay for them.

Hausmann is also right that far too often well-meaning Westerners with recent doctorates in development parachute into the Third World with ideas that seem sensible in the conference rooms of Cambridge, Washington, or Turtle Bay but flame out when tested in the tropics. Most recently, as Nina Munk showed in her book The Idealist, Jeffrey Sachs’s effort to create “Millennium Villages” crashed and burned.

According to Hausmann, this paper shows that donors can know how countries progress out of poverty and can give precise advice as a result. He says that data he and his colleagues have uncovered show “the paths to industrial development—and the dead ends—that are most relevant to a particular country today.”

I have tried to understand Hausmann’s research but it is too math-laden for me. I’ll give him the benefit of the doubt and will admit that his data shows what he says it shows. Is this useful knowledge?

I think not. It is a great leap to go from the idea that because Pandora knows if I like Johnny Cash I will like Merle Haggard and Willie Nelson to saying that if country A became successful at widget-making, countries B and C can make widgets too, even if the only thing countries A, B, and C have in common is an equivalent per capita income. The Third World is littered with the corpses of dead or moldy factories created by money granted by well meaning but wrongheaded donors.

William Easterly, in this typically hard-hitting op-ed from the Financial Times, reminds us how little we know about what sort of aid can truly help developing countries. Medical research does help, which is why the Gates Foundation’s efforts to fight malaria is worthwhile. But there’s little else that does.

“There is no definitive proof that aid stimulates the economic growth necessary to lift people out of poverty,” Easterly writes. “The obsession with internal aid is a rich-world vanity that exaggerates the importance of western elites. It is comforting to imagine that benevolent leaders advised by wise experts could make the poor world rich. But this is a condescending fantasy.”

So what can we do? The answer is to think about small projects where donors and recipients can forge a personal connection. Programs like Kiva are a good idea, as are projects that can encourage the creation of small businesses. Donors who want large projects can work to knock down protectionist schemes that prevent Third World farmers and manufacturers from selling us products we want and need at prices that pass a market test.

Poor people in Detroit or St. Louis have long known the least welcome visitor is someone who says, “I have a Ph.D. and know what you need.” When will we learn that similar visitors to Kampala or Kolkata are not likely to do much good?

2 thoughts on “Forging a personal connection”

  1. Martin Morse Wooster says:

    Professor Hausmann: Thanks for your response. I hope I was fair in summarizing the findings of your paper.

  2. I liked many things about the column and am in broad agreement with the Hayekian anti-expert view of development. However, I am not recommending anything to philantrhropists because I do not think that what is missi g in these places is money. My goal is to provide to potential actors with more info about their opportunity set based on the capabilities already expressed in their countries.

Leave a Reply

Your email address will not be published. Required fields are marked *