Failure, Global governance, International development, Measurement, Political economy, Results, Risk, Theory

Hedging bets: our new preoccupation with failure

Nobody likes to admit failure—least of all government-funded development organizations in hard economic times. Yet recent years have seen a number of prominent development agencies confess to failure. The International Monetary Fund (IMF) admitted its failure to recognize the damage that its overzealous approach to austerity would cause in Greece. The World Bank President, Jim Yong Kim, has adopted the idea of Fail Faires from the information technology industry, where policymakers share their biggest failures with one another. The United States Agency for International Development’s (USAID) Chief Innovation Officer also expressed some interest in organizing a Fail Faire, and the agency eventually did hold an “Experience Summit” in 2012.

This interest in failure is central to a broader shift in how development organizations—and other national and international agencies—have begun to work. As I argue in my new book, Governing Failure, these organizations are increasingly aware of the possibility of failure and are seeking to manage that risk in new ways.

This preoccupation with failure is relatively new. The 1980s and early 1990s—the era of ‘structural adjustment’ lending—was a time of confidence and certainty. Policymakers believed that they had found the universal economic recipe for development success.

The 1990s marked a turning point for confidence in the development success ‘recipe’. Success rates for programs at the World Bank began to decline dramatically’ critics started to label the 1980s a ‘decade of despair’ for sub-Saharan Africa; and both the AIDS pandemic and the Asian financial crisis reversed many gains in poverty reduction. These events made policymakers more aware of the uncertainty of the global environment and of the very real possibility of failure—lessons only reinforced by the recent financial crisis.

What happens to policymakers when they are more aware of the possibility of failure? On one hand, they can accept the fact of uncertainty and the limits of their control, becoming creative—even experimental—in their approach to solving problems. Or they can become hyper-cautious and risk-averse, doing what they can to avoid failure at all costs. We can see both reactions in international development circles.

A major shift in development practice over the past two decades has been the recognition that political ‘buy-in’ matters for policy success. As development organizations tried to foster greater country ownership of economic programs, they became quite creative. By reducing conditionality and delivering more non-earmarked aid to countries’ general budgets, development organizations shifted more decision-making responsibility to borrowing governments in an effort to create an open-ended and participatory process more conducive to policy success.

But development organizations also took a more cautious turn in their response to the problem of failure. The social theorist Niklas Luhmann first introduced the idea of ‘provisional expertise’ to describe this cautious trend in modern society. He pointed to the increase in risk-based knowledge that could always be revised in the face of changing conditions.

Risk management has become omnipresent in development circles, as it has elsewhere. No shovel turns to build a school without a multitude of assessments of possible risks to the project’s success, allowing the organizations involved to hedge against possible failures.

An even more prominent trend in development policy is the current focus on results, which is particularly popular in the Canadian government. Few organizations these days do not justify actions in terms of the results that they deliver: roads built, immunizations given, rates of infant mortality reduced.

At first glance, this focus appears to be anything but cautious: what greater risk than publishing the true results of your actions? Yet it is not always possible to know the results of a given policy. The problem of causal attribution is a thorny one in development practice, particularly when any number of different variables could have led to the results an organization claim as its own.

Some agencies such as the U.S. Millennium Challenge Corporation (MCC) have tried to get around this problem through sophisticated counterfactual analysis and the use of control groups in their aid programs. Yet even MCC staff members recognize that designing programs in order to gain the best knowledge about results can come at the expense of other priorities.

If donors can count as successes only those results that can be counted, they may well find themselves redefining their priorities to suit their evaluation methodology—and their political needs. In most cases, results are donor-driven: they are not calculated and published for the benefit of the recipient country but for the donor’s citizens back home, who want to know that their taxes are being spent wisely. So building roads and providing immunizations suddenly becomes more attractive than undertaking the long, slow, and complex work of transforming legal and political institutions. Caution wins out in the end.

Which kind of approach to failure is winning out today: experimentalist or cautious? Sadly it seems that the earlier experiment with country ownership has lost momentum, in part because the forms of participation involved were so much less meaningful than had been hoped. At the same time, the results agenda has only become more numbers-driven in the last few years. As agencies have grown more risk-averse after the global financial crisis, they have sought to make results-evaluation more standardized—and ultimately less responsive to the particular needs of local communities.

There is still hope, as the recent admissions of failure by major development organizations suggest. Yet the very fact that that the USAID event was ultimately named an ‘Experience Summit’ rather than a ‘Fail Faire’ is telling: even when leaders admit to failure, it appears that they can’t resist hedging their bets.

This blog post draws from my recent book, Governing Failure: Provisional Expertise and the Transformation of Global Development Finance, published by Cambridge University Press.

Earlier versions of this essay appeared on RegBlog.org and the CIPS blog.

Canada, Political economy

The austerity trap

As the prognosis for the global economy gets darker by the day, we are hearing one word over and over: austerity.  The British government has announced that it will extend its austerity measures past the next election in 2015. In Canada, Finance Minister Jim Flaherty has reiterated that the solution to the current economic crisis, both here and in Europe, is more “belt-tightening.”

But not everyone agrees about the virtues of austerity. Labour finance spokesperson Ed Balls called the British Government’s economic plans a “catastrophic error of judgment.” Two million British public sector workers are on strike over the effects of those austerity measures on their pensions. Closer to home, the former World Bank Chief Economist and Nobel-laureate, Joseph Stiglitz, recently told a Toronto audience, “Austerity is a suicide path.”

These critics are a diverse lot, including people affected by the cuts, Occupy activists, politicians of various stripes, and the leader of the International Monetary Fund. In different ways, they all point to some serious flaws in the current rush to austerity.  It’s worth looking at three of them:

1) The fallacy of composition (or: why Canadian debt isn’t just a bigger version of your family’s debt).

In a recent speech in Toronto, Flaherty noted that he’s applying to the federal government the same advice that he’s offering to Canadians: to tighten their belts and reduce debt. This sounds like it makes perfect sense. Except that it’s a classic error of logic that philosophers call the fallacy of composition: what is true of the parts is not necessarily also true of the whole.

Of course it makes sense for a Canadian family that has taken on too much debt to reduce it. But if all Canadian families at the same time reduce spending in order to pay off debt, then suddenly demand for goods drops, firms reduce production, and jobs are cut. As people lose jobs, it becomes much harder for households to reduce debt; in fact, they may have to take on more to pay the bills. And the risk to the economy is even greater if the federal government doesn’t step in to support demand but actually undermines it further by cutting back on vital services.

This same dilemma applies at the international level. Sure, Canada was able to get its act in order in the 1990’s through austerity measures (at great cost to our health system and infrastructure). But this was at a time when the Canadian economy and the global economy were in good shape.  And while we were cutting back, other countries were doing the opposite, taking up the slack. If everyone cuts back at the same time, there is no one left to keep the global economy going—making it likely that the outcome will be a deeper global recession and more, rather than less, debt in the long run.

2) The costs of austerity (or: why even the IMF thinks it’s a bad idea just now)

In a recent paper, IMF staff concluded that austerity measures do considerable damage in the short and longer term: “This conclusion reverses earlier suggestions in the literature that cutting the budget deficit can spur growth in the short term.” In other words, when someone tells you that austerity will stimulate short-term growth, they’re lying (or as Mark Blyth puts it in a brilliant short video on austerity, this is just about as believable as “a unicorn with a magic bag of salt.”)

What are the costs of austerity?  The IMF paper suggests that they include lower incomes in the short term and higher unemployment in the longer term. As more people become unemployed for longer, there is a real danger that unemployment will become entrenched. The costs of austerity are even higher in cases where a government can’t compensate by significantly lowering interest rates—as is the case today here and in Europe. Because of these very real costs, the IMF head, Christine Lagarde, is suggesting that countries like Canada and the UK not impose any immediate austerity programs while growth is fragile; instead they should be delayed until the economy is healthier. When even the IMF tells us not to impose austerity, and still the Conservative government insists on it, you have to wonder.

3) Inequality (or: whose belt are you tightening anyway?)

Not surprisingly, the IMF study also found that the costs of austerity are not equally borne by everyone. Reductions in wage income caused by austerity are three times larger than those from other kinds of income. It also notes that austerity will “add to the pain of those who are likely to be already suffering—the long term unemployed.” This means that working class people have to tighten their belts much more than others do, through job loss, reduced income and pensions, and the loss of services they rely on. As Blyth puts it: “This ‘common sense’ of austerity—of reducing public debt all at once through slashing services—involves a question of equity—who pays and who doesn’t. Those who made this mess won’t, while those who have paid for it already through the bailouts will pay again through austerity.”

Politicians proposing unpopular and foolhardy policies like to claim that ‘there is no alternative’. But there are alternatives, at least for those in Canada, the UK and other countries not struggling under the kind of crushing debt burden facing Greece. In his recent speech, Stiglitz proposed several suggestions, including investing in infrastructure and education (which would earn returns of 20-30%). The goal is not to reduce the amount that the government spends but rather to reduce government debt, which depends on the overall health of the economy. As Stiglitz notes, “Putting more people to work today means that over the next five to ten years the debt would be lower, GDP higher, the debt to GDP ratio immeasurably improved.”

Remember the unicorn next time you hear someone talk about austerity and growth in the same sentence.

First posted on the CIPS Blog on December 4, 2011.