Money can\\\'t solve structural limitations

Aid Information Management System Project (AIMS) was launched by the Economic Relations Division on October 26, 2010. The technical assistance project would consolidate aid related data on a single portal, which would make access to data effortless, relatively speaking. Co-financed by UK-Aid, Danida, AusAid and UNDP, the project costs US $ 4.47 million and is planned for implementation during 2011-16. Launch of the project in 2014 indicates some delay, however.
Economic Relations Division (ERD has been publishing "Flow of External Resources" which reports aid data for every financial year. To update myself for the occasion, I glanced through the 'Flow Book' 2013 rather rapidly. I had often used selected data from the Report for specific purposes, and had been associated with its preparation also. The book gets heavier with time as the data for every year is added. I was impressed by the new features, especially the multi-coloured graphics and the analysis. The 'data entrepreneurs' deserves congratulations even without considering the project's likely contribution to improvement of project management.   
MODEL AND METHOD FOR DATA:  I feel awe at the prospect of large mass of data since my days as a graduate student. I was assigned the task of statistical analysis of a topic of my choice, which I attempted using the data available from social surveys of US. The easy access to a large heap of data had attracted me. My attempt at regression of socio-economic variables on demographic behaviour produced bundles of paper but no intelligent result. It was the age of mainframe.
Two of my professors - both econometricians - joined me in analysing what had gone wrong. My take home:
* First: you need a well specified model embedded in good theory to make intelligent use of data; if the analysis does not produce the predicted result, check back the theory, model, and the techniques used. Any of those could have gone wrong.
* Second, data can predict what would happen in an unchanging world, not if the world changes; as to policies in future, it warns how to avoid follies of the past and make the known policy more efficient and effective, or to scale it up while containing the risk of mistakes. For innovative policy, you need to go back to some analytic model backed by experience across the world - 'best practice' in contemporary terminology.  
* Finally, do not mess around with data unless you know what you want to do with - and how to use - data: there are model embedded in theory and method. There is a fine distinction between just number and data: numbers processed to a purpose in consistence with well laid-out method are data.
Later, as an official in Finance Division or heading Bangladesh Bureau of Statistics (BBS), I encountered demands for data made by several people, including the high-ups, who did not think out carefully why they needed particular data; in some cases, even a vague sense of the relationship among the various numbers was absent. Statistics loses its purpose, namely to know facts numerically as far as practicable.
TWO-AND-HALF GAP MODEL:  That takes me to 'two-gap model' - the only model I know of which explains why aid is needed. Excess of import over export and of investment over savings require access to foreign savings through current account transfer. Until the country attains equilibriums on both counts and the economy is strong enough to borrow on its own on the market, external support is needed.  
I jokingly termed it 'two-and-half model' - 'half' representing the shortfall in government revenue, even when the two gaps were closing. Jokes are often born out of ignorance, or of a little knowledge which is more dangerous than ignorance. Some graduate-level macroeconomic texts turned around the notion of saving but without distorting facts at all. 'That portion of income accruing to an individual income which is not put to consumption is saving'. This would include tax also in saving.
Such a residual notion of saving - that part of income which is not consumed - is useful in linking aid with saving.  Tax is part of saving mobilised by government, and shortfall of tax revenue is also shortfall of saving. The notion is helpful in identifying the location of shortfall and directing focus of policy.  
The essential argument underlying the structure of two-gap model can be traced back to earlier sources. At the end of World War II, Lord Keynes negotiated the terms of lend-lease with the USA. Repayment for debt was linked with export receipts, i.e., repayment would rise or fall with export revenues. That is a fool-proof way to address shortage of foreign currency and economic contraction that follows from its excessive outflow. Marshall Plan had more generous terms which helped resuscitate the economy of West Europe.
Aid has generalised the innovation made by the innovative economic analysis of Lord Keynes and the bold political leadership of President Delano Frederick Roosevelt. A Democratic President, Roosevelt took in his cabinet sympathetic Republicans.
Keynes had leant the lesson from the consequences of World War I. Heavy reparations on Germany caused outflow of resource which led to contraction and deep frustration in the society, preparing the ground for the rise of politics of irrationality. Decolonisation followed World War II, and the erstwhile colonial powers felt that the former colonies need to be helped out of the debris.  
Neo-liberals are not generally in favour of transfer payments - but not consistently. For example, Milton Friedman advocated guaranteed minimum income and education or food vouchers. Minimum guaranteed income obliged the government to make payment to raise personal income to the defined level. Vouchers are specialised money that can buy only specified goods; it lacks the general purchasing power of money. Specialised money gives the needy access to goods and services without interfering with the market.
Friedman was focused on microeconomics and did not believe that macroeconomics was a feasible discipline - international macroeconomics was the farthest; he did not scale up transfer to the global level. For a while imagine the world was one economy, then Friedman's transfer scheme would operate in that imagined one-world one-nation economy.
AID, MACROECONOMICS & INSTRUMENTS FOR TRANSFER: The two-gap model gives a framework for assessing how much aid should be available to a country as well as for coordination of aid with the national economy. Dispensing with the macro paradigm leaves us without the critical coordination framework. Aid is to support sustained growth and macroeconomic stability; projects or programmes are instruments or vehicles for transfer of resources. Projects have received more attention from the development partners, and less to macroeconomics.
Projects are larger in number and variety - and each project contains more engineering, managerial and professional details. A health or education project, for example, includes not only the structures and equipment, but also medical personnel, training, curriculum, etc. The development partners also have more people to track projects.
Macroeconomic interventions are relatively more focused, and need fewer people and less frequent monitoring. For example, money supply, fiscal performance, balance of payments, can be meaningfully reviewed on quarterly and annual basis. There is also broad division of labour, with macroeconomic monitoring assigned to International Monetary Fund (IMF). The IMF office in Dhaka has only one official from Washington; at World Bank there are several, and add to that the missions from headquarters.
Macroeconomic consideration should be at the forefront - or at least should not take a back seat, as it seems doing now. That entails that the development partners, especially the multilateral institutions, should have instruments for low-conditionality and fast-disbursing assistance for stabilisation and acceleration of growth, while taking care to avoid overheating or deflationary trends. Public investment is more efficacious for offsetting wide fluctuations.
Aid data alone lack meaning unless related to other fiscal and monetary data. Aid finances less than 2.0 per cent of deficit financing, i.e. less than half of deficit financing, measured in terms of GDP (gross domestic product). The crucial question is the likely impact of replacing aid by deficit financing from domestic sources, i.e. raising domestic financing by 2-3 percentage points while holding total deficit constant. The feasible limit of domestic financing is measured by idle resource proxied by unemployment which is estimated currently at 4-5 per cent.
Disguised unemployment - those who work for an hour or so in a week - is estimated at 20-25 per cent. If their output were translated to that of a worker working full time throughout the week, it would be output of one full-time worker for the week. Domestic financing of deficit at 4-5 per cent would have moderate or little impact on inflation. If there is an output (structural) response, the impact could be neutralised. However, price impact dominates consideration of deficit.  
The unemployment measures, taken without taking into consideration other variables, appear to allow a high level of deficit. But there are other implications also, for example, cooperating input, capital equipment, input, output market, and so on.  If these were not available in sufficient proportion, the output of labour alone would be lower - that is, the worker may put in hard work, but remains poor, or may even get worse.
The point is the positive relationship between inflation and employment. At Jackson Hole seminar this year (September-October), Ms. Janet Yellen, US Fed President, echoed Ben Bernanke that Quantitative Ease would be tapered off in synch with drop in unemployment. The relationship between public expenditure and employment are positive - up to a point, though. The economic downturn has witnessed resurgence of Keynesian policy, though applied with caution.  
A word of caution is in order for economics of mimesis. Injection of money can activate idle resources but cannot address structural constraints; large deficit, financed whether by domestic or foreign borrowing, tends to fuel inflation. There is more money around than goods and services. Aid makes some difference though: first, the portion spent on import amount goes out immediately; the portion spent within the country adds to money within the economy and raises demand. The amount is too minuscule to cause significant impact. That money can solve the structural limitations is an irresponsible opinion - more so the remark that money is not a problem.  

Dr. Mashiur Rahman is Economic Adviser to Prime Minister. A shorter pre-edited version was read out at the launching of AIMS on October 26, 2014 at ERD.