White elephants, up close... real close

As part of our series on ITFD student policy projects, here is the summary of another one I learned a lot from: Kristin Keohan, Kevin McEvilly, Kevin Timoney and Kristoff Potgieter (supervised by fellow ITFD steering committee member Antonio Ciccone) analyse expansion plans for the giant MOZAL aluminum smelter in Mozambique. The IFC, the lending arm of the World Bank, got them of the ground. MOZAL is already huge... accounting for 66% of Mozambique exports. Phase III would now build on the earlier success, and add a lot of capacity. To that end, there would need to be fresh investment in dams to generate hydroelectric power, etc. Is this a good idea? You would think so. Mozambique was a basket case before MOZAL came along; nobody from the rest of the world wanted to invest there. Once the aluminium plant was up and running, the perception of investors changed; FDI started to flow.

Despite all this, the 4 K's make a (to me) convincing case that this is a bad idea. First of all, there is no longer any need to subsidize expansion - the project risk is low, and giant firms like BHP which own the majority of MOZAL can shoulder the costs if they are economically viable. Their key argument why neither the IFC nor the Mozambique government should subsidize is that the externalities seem very small. There are few backward linkages: MOZAL is producing aluminum from bauxite mined in Australia, using cheap energy from South Africa.  South Africa now increasingly needs its own electricity, and MOZAL III is largely an attempt to strong-arm the local government into providing subsidized energy. Crucially, the spilloves are tiny -- very few people are employed at MOZAL, and fewer are from Mozambique. In our urge to do "something" for development, it is tempting to bet on a project that seems like a winner... but it may be better  to do so elsewhere.


mozal

How not to combat terrorism

Terrorism is driven by poverty and deprivation in the Third World, right? Surely, a great way to combat it is to give development aid, and make the lives of the poor, downtrodden masses better... or maybe not. ITFD students Cristina Yoong, Rachel Lund, Joonas Uotinen, and Sonja Settele look at the issue in their policy topics presentation. They offer some powerful arguments that question how much, in particular, the US should invest in the largely lawless FATA region in Northwestern Pakistan. They show that most leading terrorists come from more educated, well-off households, and that a proclivity towards terrorism is not significantly correlated across countries with poverty. Even the most optimistic studies suggest that aid would have to be in the hundreds of billions to reduce the recruitment of low-level terrorists by a significant number. Equally importantly, they show that much of the aid actually helps the Taliban directly, through protection money and the like. Their presentation is here:
Terrorism and Aid